Raising the Minimum Wage: Another Empty Promise to the Working Poor

Content

Overview
This paper provides a historical view of the effect of increases in the federal minimum wage on the working poor with a particular focus on the past 15 years. Since its inception in 1938, increases in the federal minimum wage have become an increasingly weak mechanism for addressing the problem of poverty in America. This continuing deterioration stems from the fact that fewer low-wage employees are supporting a family on a minimum wage income. As poverty becomes more a problem of hours worked and not an individual’s wage level, anti-poverty policies that focus on wages will be less efficient than polices that focus on income, such as the Earned Income Tax Credit (EITC).

Wages vs. Income
While wages and income are certainly related, the connection between the two has always been tenuous. In 1946, Nobel prize-winning economist George Stigler commented, “the connection between hourly wages and the standard of living of a family is remote and fuzzy.” As this study shows, the fuzzy connection in 1946 has become blurrier over time.

Examining Census Bureau data since 1939, the authors found that fewer low-wage employees live in poor households today than in years past. Specifically, in 1939, 85 percent of low-wage employees1 were living in poor households. By 2003, only 17 percent of low-wage employees were living in poor households. Consequently, attempting to target poor families by manipulating wages is an inefficient means of addressing the problem.

Even more important than the number of low-wage employees living in poor households is the number of low-wage employees who are the heads of poor households. This stereotypical beneficiary of an increase in the wage floor is the one supporters of minimum wage increases claim represents the typical minimum wage employee. In reality, a small fraction of low-wage employees are the head of a poor household, and this number has decreased significantly over time. In 1939, nearly one-third
(31%) of all low-wage employees were the heads of a poor household. By 2003, only 9 percent of low-wage employees were heading a poor household.

These statistics all reveal an underlying point—modern families have multiple workers whose collective earnings make up the family income. Federal anti-poverty policy should adjust accordingly. As more women and teenagers have entered the workforce as second and third earners, the ranks of low-wage employees contain fewer individuals singlehandedly supporting a family.

Federal Minimum Wage Increases and Poverty
Abyproduct of the aforementioned changes in the composition of family incomes is that the poor make up a small percentage of beneficiaries from a wage hike. Contrary to popular perception, the average minimum wage employee is not in poverty or raising a family on a mini-mum wage income. Analyzing Census data, the authors found that a beneficiary from a proposed federal minimum wage hike to $7.25 an hour is far more likely to be in a family earning more than three times the poverty line than in a poor family. In total, only 12.7 percent of the benefits from a federal minimum wage increase to $7.25 an hour would go to poor families. In contrast, 63 percent of benefits would go to families earning more than twice the poverty line and 42 percent would go to families earning more than three times the poverty line. The average benefit per household is approximately the same, with poor families receiving a benefit of $1,110 and families earning three times the poverty line earning $1,090—nearly the same benefit, despite a vast difference in family incomes.

While there is strong empirical evidence to suggest that increasing the minimum wage will have adverse employment effects—particularly among young African Americans, young nonhigh school graduates, and teenagers—the authors assume no disemployment effects associated with the minimum wage hike so as to allow the policy its best chance to achieve the poverty-reducing goals promised by its proponents. While the minimum wage is often promoted as a policy designed to help the poor, minorities, and single mothers, this analysis reveals that only 3.7 percent of the benefits from a $7.25 an hour federal minimum wage would go to poor African-American families. Only 3.8 percent would go to poor singlemother households. Even more troubling, the majority of “working poor” families—families who are working but remain in poverty— receive no benefit from an increase to $7.25 an hour. These families don’t benefit because they already earn more than the new federal minimum wage and remain in poverty either because of a low number of hours worked or a large family size. Many of these individuals would benefit far more from an increase in the generosity of federal and state EITC programs.

Work Effort and Poverty
Examining the hours worked by poor employees reveals that increases in work effort could have a significant effect on income. The authors found that the median wage of the highest earner in a poor household was much higher than the proposed federal minimum wage—$9.25 for poor households and $9.60 for poor and near-poor households (up to 150 percent of the poverty line). While this wage should be sufficient to put a family of four out of poverty (even without a second or even third earner), the data reveal that the majority of these individuals are not working full-time.

The median hours worked for the highest earner in a poor family in 2003 was 1,720— significantly less than full time (2,080 hours a year). While including near-poor families in the calculation brings this number up to 1,872 hours, the majority of these individuals are still working less than full time at their current wage. These individuals would receive significantly more benefit from programs that promote increased work effort than they ever would from a minimum wage increase.

Single Mothers and the Minimum Wage
Advocates of increasing the federal minimum wage often insinuate that primary beneficiaries will be single mothers raising a family on a minimum wage income. As was mentioned above, only 3.8 percent of the benefits from an increase to $7.25 an hour accrue to poor single mothers. One of the factors causing this low percentage of benefits is the fact that the majority of poor single mothers (58%) have hourly wages above this level. In addition, only 18.5 percent of the benefits going to single mothers will go to those in poverty. The majority of benefits going to single mothers will go to those earning more than twice the poverty line.

Senator Edward Kennedy (D-MA), the primary sponsor of a federal minimum wage increase to $7.25 an hour, recently stated in support of an increase that “the jobs available to women leaving welfare are often minimum wage jobs.” Census data, however, shows this is not the case. From 1995–2000, the time period following welfare reform, the employment rate of single mothers increased by 10.8 percentage points. Many of these single mothers were undoubtedly leaving the welfare rolls and joining the workforce. If Sen. Kennedy’s claim is correct, one would expect a significant increase in the number of single mothers holding low-wage or federal minimum wage jobs. In reality, 77 percent of the increase in employment was accounted for by single mothers holding jobs paying more than low wages (50 percent of the average private sector hourly wage rate).

Examining the period over the 1990’s business cycle produces similar results. The employment rate of single mothers increased by 14 percentage points, with 64 percent of this increase accounted for by single mothers earning more than low wages. Only 24 percent of the increase can be accounted for by those who held jobs at the prevailing federal minimum wage rate.

Conclusion
The authors calculate that, absent any employment loss, the cost to employers of the proposed increase in the federal minimum wage to $7.25 an hour will be $18.26 billion. Only 12.7 percent ($2.3 billion) of this cost will actually go to poor families, with only 3.7 percent going to poor African-American families. The ability of the minimum wage to target poor families is weaker and decreasing over time. Contrary to the statements of its advocates, fewer and fewer low-wage employees are supporting a family on the minimum wage, with only 9 percent of low-wage employees actually supporting a poor family.

Therefore, effective anti-poverty programs must concentrate on family income and not wages. While most working poor families will not receive any benefit from an increase in the federal minimum wage to $7.25 an hour, the vast majority would receive a benefit from increases in the generosity of federal and state EITC programs. These programs provide targeted assistance to the low-income working families so often cited in support of minimum wage increases—the same families that receive a minority of the benefits from a wage increase.