Raising the Minimum Wage Won’t Eliminate Poverty
Democrats all support a minimum-wage hike, even though it’s not clear such a policy is an effective way to fight poverty
The Democratic candidates for president have a lot of ideas and plans for how to fight poverty, many of which were on display at a recent presidential forum on poverty hosted by the Poor People’s Campaign. Elizabeth Warren wants to tax the wealthy to fund programs like universal child care and free college tuition. Kamala Harris has proposed a tax credit for burdened renters. Cory Booker wants to give every American child a “baby bond” at birth to help low-income Americans build wealth. But those ideas often take a backside to one bigger, more ubiquitously agreed-upon idea: The U.S. needs to increase the minimum wage to $15 an hour.
This uniformity around a minimum wage increase is all the more interesting since it’s not clear that it’s a particularly effective — or progressive — way to fight poverty.
For one, consider the demographics of minimum wage workers. They’re young: According to the Bureau of Labor Statistics, almost half of minimum wage workers in 2018 were under the age of 25; only about 25% were over the age of 40. And while minimum wage increases do modestly reduce poverty rates — in a 2014 analysis, the Congressional Budget Office (CBO) projected that a modest increase in the federal minimum wage (to $10.10) would move 900,000 people out of poverty (out of the 45 million currently living in poverty) — the fact is most minimum-wage workers don’t live in low-income households: According to research published in 2018 the median income of households with a minimum-wage worker in 2017 was slightly less than $50,000 a year (almost double the federal poverty line for a family of four). Ten percent of those households had income over $150,000, and only 14% received food stamps.
“Anti-poverty policy in this country is targeted mostly at poor families with young children, and that’s just not who minimum-wage workers are,” says Jonathan Meer, an economics professor at Texas A&M.
But any assessment of an anti-poverty policy’s effectiveness or progressiveness would be incomplete without a discussion of the policy’s costs — and who must bear those costs. Researchers have largely found that small increases in the minimum wage produce pretty limited reductions in employment levels. And of course, someone does indeed have to pay for higher labor costs — either employers (in the form of reduced profits) or customers (in the form of higher prices).
“Anti-poverty policy in this country is targeted mostly at poor families with young children, and that’s just not who minimum-wage workers are.”
Some business owners can no doubt afford to pay their workers more. (Walmart is the favored example here.) But smaller establishments — say, bodegas, or family restaurants — employ minimum-wage workers as well. The owners of businesses like these are often not particularly wealthy: According to Payscale, a salary research website, the average salary of small business owners/operators is about $66,000. If the costs of minimum wage increases are passed on to customers in the form of higher prices, customers, many of whom are also low-income, pay the price.
“We’re just shuffling money around with no particular reason to think it’s coming from the people we want to be taking it from and going to the people we want it to be going to,” says Meer. “We may be taking away from low-income consumers and giving it to the children of upper-middle class families, which is the opposite of what we want to do.”
Compare this uncertainty to the Earned-Income Tax Credit (EITC), a popular tax credit that’s targeted to low-income workers and increases with earnings, before leveling off and phasing out. The program is distributed through the tax code — which means higher earners “pay” more for it in the form of higher taxes — and its benefits flow exclusively to lower income households. For a married couple with two children, the maximum EITC credit is $5,828 and only families earning less than $52,493 are eligible to receive the credit. According to the Center on Budget and Policy Priorities (CBPP), the EITC lifted 5.7 million people out of poverty in 2017. A working paper released in 2015 estimated that a $1,000 increase in the EITC reduces the percentage of families living in poverty by 9.4%. Researchers have also found that the EITC improves maternal health, child health, and education and labor market outcomes.
Proposals to expand the EITC abound, and some of them are even sponsored by presidential candidates — they just don’t get much attention at presidential forums and debates. Earlier this year, Sens. Sherrod Brown, Michael Bennet, Richard Durbin, and Ron Wyden introduced legislation to expand both the EITC and the Child Tax Credit (and establish a new credit — the Young Child Tax Credit — for families with young children). The CBPP estimates that the legislation, which is less ambitious than other proposals, would lift 7 million people out of poverty, reduce the child poverty rate by 28%, reduce the deep poverty rate for children by 40%, and reduce the overall poverty rate to 12% (from 14%). Researchers estimate that Sen. Kamala Harris’s LIFT the Middle Class bill, which dramatically expands the EITC, would lift 9.6 million people out of poverty and reduce the poverty rate by 3%.
Proposals such as these face two disadvantages. They lack the catchy mass appeal of a $15 minimum wage. And they carry big, visible price tags for the federal government. The costs of minimum wage increases are murkier and harder to pin down — it’s easy to assume, and politicians increasingly suggest, that the costs will be borne exclusively by large employers.
Despite debates within the Democratic party over whether a $15 federal minimum wage will harm certain parts of the country, the idea is almost universally popular among candidates for president, even among moderates like Joe Biden and John Hickenlooper. And there are plenty of other arguments — that aren’t specific to anti-poverty policy — for raising the minimum wage. But as the policy debates heat up, it’s worth remembering that there are better, more progressive ways to fight poverty.