MYTH: Raising the minimum wage would lift people out of poverty.
REALITY: Raising the Minimum Wage would not help the poor. Despite the minimum wage remaining stagnant for the last 12 years, the poverty rate has declined about 33%, going from 15.1% in 2010 to 11.6% in 2021. The minimum wage has had little to no effect on poverty. Other factors like economic growth were responsible for the decline in poverty levels.
A vast amount of research points to negative consequences when the minimum wage is increased. There have been hundreds of studies examining the effect that raising the minimum wage has on employment and poverty levels. An extensive review by Professor David Neumark examined all the studies and concluded that raising the minimum wage negatively impacts employment for young and low-skilled workers. A majority of those who make minimum wage are young. According to Pew Research, 50.4% of minimum wage workers are between the ages of 16 and 24.
Neumark also found that raising the minimum wage would have little effect on the level of poverty. Neumark stated, “Simple calculations suggest that a sizable share of the benefits from raising the minimum wage would not go to poor families.” That’s because a majority of those in poverty have no workers in their household (57%). Raising the minimum wage would not affect any of those in poverty who also don’t work full-time or year-round. According to 2017 data from the US Census Bureau, roughly 39.7 million people lived in poverty. Of the 39.7 million people, only 3.2 million people were full-time workers who were continuously employed throughout the year.
According to the Congressional Budget Office, “Increasing the federal minimum wage would raise the earnings and family income of most low-wage workers, lifting some families out of poverty—but it would cause other low-wage workers to become jobless, and their family income would fall.”
Because employment for young and low-skill workers would be negatively impacted, raising the minimum wage would lead to unemployment. According to Steve H. Hanke, Professor of Applied Economics at Johns Hopkins University, “There are seven European Union (E.U.) countries in which no minimum wage is mandated (Austria, Cyprus, Denmark, Finland, Germany, Italy, and Sweden). If we compare the levels of unemployment in these countries with E.U. countries that impose a minimum wage, the results are clear. A minimum wage leads to higher levels of unemployment. In the 21 countries with a minimum wage, the average country has an unemployment rate of 11.8%. Whereas, the average unemployment rate in the seven countries without mandated minimum wages is about one-third lower — at 7.9%.”
Similar results are found in Canada. According to an article written for Fraser Institute, “The over dozen Canadian studies that have examined provincial minimum wage hikes are more conclusive and show larger negative effects than in the United States. On average, the Canadian evidence finds that a 10 percent increase in the minimum wage decreases youth employment by between three and six percent.”
So, if raising the minimum wage doesn’t work, then what will? The solution is simple, increase Earned Income Tax Credit. The IRS states that “the Earned Income Tax Credit (EITC) helps low- to moderate-income workers and families get a tax break. If you qualify, you can use the credit to reduce the taxes you owe – and maybe increase your refund.”
David Neumark, about comparing EITC and minimum wage, wrote, “The earned income tax credit targets low-income families s much better, increases employment and reduces poverty, and for all these reasons seems far more effective,”
Increases in EITC have most of the benefits of raising minimum wage, without any of the horrible side effects.
According to the Federal Reserve Bank of Richmond, “When compared with more targeted policies like the Earned Income Tax Credit and other transfer programs aimed at aiding only the poor, the minimum wage becomes harder to justify as an antipoverty measure.”
Neumark, D., & Shirley, P. (2021). Myth or measurement: What does the new minimum wage research say about minimum wages and job loss in the United States? https://doi.org/10.3386/w28388
Neumark, D., & Wascher, W. L. (2022, August 9). Minimum wages. MIT Press. Retrieved September 28, 2022, from https://mitpress.mit.edu/9780262515085/minimum-wages/
Neumark, D., & Wascher, W. L. (2010). Minimum wages. MIT Press.
Hanke, S. H. (2014, March 24). Let the Data Speak: The Truth Behind Minimum Wage Laws. Cato.org. Retrieved September 28, 2022, from https://www.cato.org/commentary/let-data-speak-truth-behind-minimum-wage-laws
Morrison, W. (2014). Raise the wage? Federal Reserve Bank of Richmond. Retrieved September 29, 2022, from https://www.richmondfed.org/publications/research/econ_focus/2014/q3/feature3
Publisher. (2021, April 5). How increasing the federal minimum wage could affect employment and family income. Congressional Budget Office. Retrieved September 29, 2022, from https://www.cbo.gov/publication/55681#:~:text=In%20general%2C%20increasing%20the%20federal,their%20family%20income%20would%20fall.
Sherk, J. (2007, January 8). Raising the minimum wage will not reduce poverty. The Heritage Foundation. Retrieved September 29, 2022, from https://www.heritage.org/jobs-and-labor/report/raising-the-minimum-wage-will-not-reduce-poverty
Lammam, C., & MacIntyre, H. (2019, May 17). Minimum wage increases won’t solve poverty: Op-ed. Fraser Institute. Retrieved September 29, 2022, from https://www.fraserinstitute.org/article/minimum-wage-increases-wont-solve-poverty
Wolla, S. A. (n.d.). Would increasing the minimum wage reduce poverty? Econlowdown.com. Retrieved September 29, 2022, from https://www.econlowdown.org/v3/public/would-increasing-the-minimum-wage-reduce-poverty
Boyce, P. (2019, July 5). Why the minimum wage can’t solve the poverty problem | Paul Boyce. Foundation for Economic Education . Retrieved September 29, 2022, from https://www.google.com/amp/s/fee.org/articles/why-the-minimum-wage-can-t-solve-the-poverty-problem/amp
Adams , M. (2013, March 11). Raising the minimum wage hurts the poor . USNews. Retrieved September 29, 2022, from https://www.usnews.com/opinion/blogs/economic-intelligence/2013/03/11/raising-the-minimum-wage-wont-help-the-poor
Cox, J. (2015, December 30). Hiking minimum wage won’t stop poverty: Fed paper. CNBC . Retrieved September 29, 2022, from https://www.google.com/amp/s/www.cnbc.com/amp/2015/12/30/hiking-minimum-wage-wont-stop-poverty-fed-paper.html