Economists agree: Raising the minimum wage reduces poverty

January 4

One funny part of watching journalists cover the minimum wage debate is that they often have to try and referee cutting-edge econometric debates. Some studies, notably those lead by UMass Amherst economist Arin Dube, argue that there are no adverse employment effects from small increases in the minimum wage. Other studies, notably those lead by University of California Irvine economist David Neumark, argue there is an adverse effect. Whatever can we conclude?

There are full-time and part-time openings at the Thai Kitchen restaurant in Silver Spring that pay the minimum wage. The openings represent the toughest part of the slow economic recovery occurring in the United States: Many of the new jobs are for low pay.<br />(Michael S. Williamson / The Washington Post)
There are full-time and part-time openings at the Thai Kitchen restaurant in Silver Spring that pay the minimum wage. The openings represent the toughest part of the slow economic recovery occurring in the United States: Many of the new jobs are for low pay.
(Michael S. Williamson/The Washington Post)

But instead of diving into that controversy, let’s take a look at where these economists, and all the other researchers investigating the minimum wage, do agree: They all tend to think that raising the minimum wage would reduce poverty. That’s the conclusion of a major new paper by Dube, titled “Minimum Wages and the Distribution of Family Incomes.”

Let’s first highlight the major results. Dube uses the latest in minimum-wage statistics and finds a negative relationship between the minimum wage and poverty. Specifically, raising the minimum wage 10 percent (say from $7.25 to near $8) would reduce the number of people living in poverty 2.4 percent. (For those who thrive on jargon, the minimum wage has an “elasticity” of -0.24 when it comes to poverty reduction.)

Using this as an estimate, raising the minimum wage to $10.10 an hour, as many Democrats are proposing in 2014, would reduce the number of people living in poverty by 4.6 million. It would also boost the incomes of those at the 10th percentile by $1,700. That’s a significant increase in the quality of life for our worst off that doesn’t require the government to tax and spend a single additional dollar. And, given that this policy is self-enforcing with virtually no administrative costs while challenging the employer’s market power, it is a powerful complement to the rest of the policies the government uses to boost the living standards of the worst off, including the Earned Income Tax Credit, food stamps, Medicaid, etc.

Now, this is normally the part where we’d have to go through the counter-arguments, using different data and techniques from different economists, to argue that the minimum wage wouldn’t do this. But this is the fun part: Dube’s paper finds a remarkable consistency across studies here. For instance, in a 2011 paper by minimum-wage opponent David Neumark, raising the minimum wage 10 percent would reduce poverty 2.9 percent (an elasticity of -0.29) for 21-44-year-old family heads or individuals. That’s very similar to what Dube finds. Neumark doesn’t mention this directly in the paper however; Dube is able to back out this conclusion using other variables that are listed.

Indeed, Dube digs out the effects of the minimum wage on poverty from 12 different studies in the new wave of literature on the topic that started in the 1990s with David Card and Alan Krueger field-creating research. Of the 54 elasticities that Dube is able to observe in these 12 papers, 48 of them are negative. Only one study has a sizable positive one, a 2005 one by David Neumark, a study that stands out for odd methodology (it lacks state and yearly fixed effects, it assumes quantiles are moving in certain directions) that isn’t standard in the field or in his subsequent work. (Indeed, it is nothing like Neumark’s standard 2011 study, mentioned above, which finds that the minimum wage reduces poverty.) Including that study, there’s an average elasticity of -0.15 across all the studies; tossing it, there’s one of -0.20 across the 11 studies, similar to what Dube finds.

However these previous studies also have issues which Dube’s new study examines. This paper uses data up through 2012, so there is much more substantial variations to examine between states’ minimum wages compared to earlier studies from the 1990s. Meanwhile there are additional controls added, including those that deal with the business cycle as well as regional effects. The range of controls provide 8 different results, all of which are highlighted.

Now, as a general rule with these numbers, you should never observe too far away from the mean — that is, you shouldn’t take the effects of small changes to see what would happen if we, say, increased the minimum wage 500 percent, or to levels that don’t actually exist right now. But the results are promising.

Indeed, they are promising on three different measures of poverty. There’s the normal definition of poverty established in the 1960s as a result of how much food costs takes up in your family budget. But the relationship is both relevant and even stronger for the poverty gap, which is how far people are away from the poverty line, and the squared poverty gap, which is a focus on those with very low incomes. The elasticities here are -0.32 and -0.96 respectively, with the second having an almost one-to-one relationship because the minimum wage reduces the proportions of those with less than one-half the poverty line.

What should people take away from this? The first is that there are significant benefits, whatever the costs. If you look at the economist James Tobin in 1996, for instance, he argues that the “minimum wage always had to be recognized as having good income consequences….I thought in this instance those advantages outweighed the small loss of jobs.” Since then there’s been substantially more work done arguing that the loss of jobs is smaller or nonexistent, and now we know that the advantages are even better, especially when it comes to boosting incomes of the poorest and reducing extreme poverty.

The second is that this isn’t a thing that people proposing an inequality agenda just happened to throw on the table. A higher minimum wage is a substantial response to the challenges of inequality. Opponents of a higher minimum wage focus on the idea that it largely won’t benefit the worst off. However, look at this graphic from the study:

A higher minimum wage will lead to a significant boost in incomes for the worst off in the bottom 30th percent of income, while having no impact on the median household.

As many economists have argued, the minimum wage ”substantially ‘held up’ the lower tail of the U.S. earnings distribution” through the late 1970s, but this effect stopped as the real value of the minimum wage fell in subsequent decades. This gives us an empirical handle on how the minimum wage would help deal with both insufficient low-end wages and inequality, and the results are striking.

Charles Darwin once wrote, “If the misery of the poor be caused not by the laws of nature, but by our institutions, great is our sin.” One of the key institutions of the modern economy, the minimum wage, could dramatically reduce the misery of the poor. What would it say if we didn’t take advantage of it?

Mike Konczal is a fellow at the Roosevelt Institute, where he focuses on financial regulation, inequality and unemployment. He writes a weekly column for Wonkblog. Follow him on Twitter here.

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