Minimum wage might not help as much as you think

Minnesota Rally for minimum wage increase (Flickr / Fibonacci Blue)

Minnesota Rally for minimum wage increase (Flickr / Fibonacci Blue)

Raising the minimum wage might not help poor people as much as we think, according to a new peer-reviewed study by Thomas MaCurdy, a professor at Stanford.

Proponents of raising the minimum wage usually claim that it will help poor people, especially families trying to support children. Thus, the debate is typically about who receives the increased earnings. Opponents of the increase argue that most minimum-wage earners are teenagers and that raising the wage will hurt employment. But supporters contend that the employment effects are small and the policy still creates a net benefit for low-income families.

MaCurdy took a different approach than usual to evaluate how effective raising the minimum wage is at reducing poverty. He evaluated who paid for the minimum wage increase. There are three possible options.

The first is that employees pay (because some lose their jobs). This is a common argument from economists and business owners; however, an increasing number of studies suggest otherwise, leading proponents of the minimum wage increase to largely dismiss this possibility.

Second, employers could pay in the form of reduced profits. MaCurdy argued that this is unlikely as well because most minimum-wage earners are in highly competitive industries like retail or restaurants, and they cannot afford to reduce their already low profit margins. Research (and the basic theory of capital) echo his conclusion.

That leaves the option for consumers to pay by companies raising their prices to cover the increased labor cost. It is this outcome that MaCurdy focused on analyzing, since it is currently suggested by academic research and economic principles as the most likely.

So if companies will raise their prices in response to the minimum wage increase, who will be affected? That’s the question the study focused on.

To shed some light, MaCurdy studied the minimum wage increase from 1996 and viewed the resulting higher prices as something like a “sales tax.” There’s some bad news. “Prices tend to go up most on those goods that make up a larger fraction of consumption for the poor,” he said. As a result, the tax from increasing the minimum wage is regressive – it hits poor people at a higher rate.

It gets worse. On the benefit side, almost as much in extra earnings from the minimum wage hike goes to high-income families as low-income families, and only $1 in $5 goes to families supporting children with a low-wage job. “The message of these findings is clear: raising wages wastefully targets the poor contrary to conventional wisdom,” said MaCurdy.

When one considers the cost analysis (that low-income families pay the regressive tax) the results are more disheartening. “Whereas less than one in four low-income families benefit from a minimum wage increase of the sort adopted in 1996, all low-income families pay for this increase through higher prices rendering three in four low-income families as net losers. Meanwhile, many high-income families are net winners,” said MaCurdy (my emphasis).

This demonstrates that raising the minimum wage is not nearly as effective an antipoverty policy as we might think.

“To be sure, companies on their own—such as Wal-Mart last week—do raise the wages of their lowest-paid workers, typically when it is necessary to retain a stable, productive workforce,” said MaCurdy in the Wall Street Journal. “But this isn’t the same as a government-mandated, economy wide raise.”

Published on Opportunity Lives