Would raising the minimum wage reduce welfare costs? Some solid conservatives have recently suggested it would.
According to Phyllis Schlafly, “rais[ing] the minimum wage would elevate many low-wage earners above the income threshold that qualifies them for benefits and should result in reduced welfare spending. That’s a tradeoff Republicans could support.”
Sadly, the evidence shows otherwise. Schlafly rightly expresses concern that the wages of less-skilled workers have not increased as quickly as more-skilled workers. But raising the minimum wage will not address this problem.
Pay increases driven by increased productivity do reduce the welfare rolls, but artificial raises mandated by government fiat have unintended consequences. When the minimum wage rises, employers reduce hiring, and unemployed workers qualify for a lot more benefits than employed workers do. So raising the minimum wage puts both upward and downward pressure on the welfare rolls. Some workers win, but others lose.
So which effect matters more? The existing evidence shows that raising the minimum wage either has no influence on welfare rolls, or slightly increases them. To quote the conclusion of one study expressly examining the issue following prior hikes in the minimum wage:
This paper has investigated the effect of minimum wages on welfare caseloads using state level panel data. Our results suggest that higher minimum wages may have a substantial positive effect on the size of the AFDC caseload and that, therefore, minimum wages are unlikely to help many potential welfare recipients achieve self-sufficiency.
The study estimates that a 40 percent increase in the minimum wage — as President Obama proposes — would increase welfare spending by 4 to 8 percent. It would be wonderful if raising the minimum wage reduced poverty and welfare spending. Unfortunately, it does not.