Minimum Wages and Poverty: Will the Obama Proposal Help the Working Poor?

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As this year’s economic crisis hit everyone’s pocketbooks, some advocates called for another increase in the federal minimum wage. Existing proposals—including presidential candidate Barack Obama’s “poverty” strategy and legislation introduced by Senate leaders late last year—would enact a minimum wage of $9.50 an hour and mandate annual indexing to inflation.

Even economists who support minimum wage hikes acknowledge that there is a tipping point at which the benefits of a minimum wage hike are outweighed by their unintended consequences. New research from the Employment Policies Institute shows that a $9.50 minimum wage will approach that point. Economists at American University and Cornell University conclude this high minimum wage would fail to improve our nation’s poverty rate because (1) over 60 percent of the benefits would go to families with incomes more than 2 times the federal poverty level, and (2) the job loss suffered by the lowest skilled employees could range from 450,000 to 4 million.

The study also shows that the last minimum wage hike also fell short of achieving any poverty reductions, again because of poor target efficiency and resulting job loss. Since the benefits of a wage hike predominantly go to families that are not poor, and because those who have the lowest skill levels are the first to lose their job, minimum wage hikes consistently miss their mark. Instead, policymakers should look to programs like the Earned Income Tax Credit, which provides income to the working poor without erecting barriers to their employment.