Does the Minimum Wage Reduce Poverty?

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This study by economists Richard Vedder and Lowell Gallaway shows convincingly that minimum wages, because of inefficient targeting of the poor and unintended adverse consequences on employment and earnings, are ineffective as an antipoverty device. The report relies on an impressive array of empirical evidence showing that, however one views the data, in the United States, state and federal minimum wages have not reduced poverty.

National Analysis for the United States
The authors conduct their national analysis using historical data on the official government poverty rate for households in the United States. They examine whether, after adjusting for price changes, the business cycle and the level of per capita federal transfer payments, the national minimum wage was effective in lowering the poverty rate. Drs. Vedder and Gallaway also estimate the effect of the national minimum wage on the poverty rates for sub-groups in the population based on gender, race, ethnicity and age. They find that the national minimum wage was ineffective in reducing poverty both in the aggregate and for specific subgroups. In fact, for some subgroups, the minimum wage actually appeared to raise the level of poverty.

The economists also experiment with different poverty definitions, including one recommended by the National Academy of Sciences, and other definitions that use different income cut-off levels. They find that the national minimum wage had no statistically significant negative relationship to the rate of poverty regardless of how poverty was measured.

To avoid any error from known deficiencies in the Consumer Price Index (CPI), the authors also repeat their analysis using an adjusted CPI that produced lower inflation rates in the 1970s and 1980s. Again, there is no statistically significant negative relationship between the minimum wage and poverty.

The minimum wage conceivably could reduce poverty in selected geographic areas, if not nationally. Therefore, the authors also investigate the possibility that minimum wages reduced poverty in particular geographic regions or in areas differing in population density. Once again, they find no statistically significant negative effects.

The authors also assess the effects of minimum wages on poverty among full-time workers who worked for an entire year. If minimum wages were to reduce poverty, the effect is most likely to show up among this group. This is because, if such fully employed workers keep their jobs and maintain their hours, they are likely to see a much larger effect on their annual income than those who are not so fully employed. However, the authors do not find a statistically significant poverty-reducing effect for full-time workers, either in the aggregate or for subgroups. It is likely that some of these workers saw little or no wage gain because their wages were above or in the upper part of the range affected by the wage mandate. Also, any gains to full-time workers in poverty may have been offset by employment losses (either in terms of jobs or hours) by other household members or loss in overtime pay to the full-time workers.

State-Level Analysis
Because some states have minimum wage laws requiring higher wages than the federal law, the authors also consider the poverty rates in such states. Specifically, they examine whether, in states with state minimum wages above the national level, poverty rates were lower than in states with the national minimum wage in effect. Their analysis reveals no statistically significant poverty-reducing effect of the higher state minimum wages. This finding is robust against alternative specifications of their statistical model.

This state-level analysis implies that states with lower minimum wages do not as a result experience higher rates of poverty. This is relevant for the current “State Flex” proposal of the current Bush administration. Under this proposal, states would be given the flexibility to opt out of future federal minimum wage increases. Critics contend that this would lead to an increase in low-income families in those states that do not follow lockstep with a federal increase. However, this report implies that such a State Flex policy would not lead to increases in poverty.