There is a lot of talk about raising the minimum wage to $10.10. I sense many advocates believe this will lift countless millions out of poverty. Is that true and is the minimum wage a central factor in reducing poverty?
I'm not advocating for or against the minimum wage. The Congressional Budget Office did a review of the economic literature and concluded that, on balance, a raise to $10.10 would have a net positive impact. So let's go with that for now (more below). My question is about the minimum wage as a poverty fighting tool.
There were 46.2 million people below the poverty income threshold for income before taxes, transfers, and noncash benefits. By definition, the minimum wage will only have in impact on people earning a wage (and their dependents). So let's break down the overall poverty number. Keep in mind that being in the "labor force" means being employed or actively looking for work.
Here is data from two government reports, A Profile of the Working Poor, 2011, from the Bureau of Labor Statistics and Income, Poverty, and Health Insurance Coverage in the United States: 2011, from the Census Bureau. (I'm using 2011 data because it is the most recent year for which all the below data exists.):
- Nearly twenty million of the poor were not of working age. (Teens and seniors who were in the work force at least 27 weeks totaled to a little more than 100,000 people.) That leaves 26.5 million working age adults..
- There were 13.7 million of the 26.5 million who were of working age but were not in the work force at all. About a third of these folks (4.3 mil) were disabled. The remaining people 9.4 million likely included the incarcerated (probably about a million), stay at home parents, or the otherwise not employed and not looking. That leaves 12.8 million in the labor force for at least part of the year.
- Of those 12.8 million in the labor force, 2.4 million were in for less than 27 weeks, leaving 10.4 million who were in the labor force for at least 27 weeks.
- Of the 10.4 million in the labor force, 1.6 million were not employed at all, and another 3.9 were employed only as part-time workers, leaving 4.9 million usual full-time workers in the labor force.
Only in this remaining group of 4.9 million workers do we have the possibility of low-wage workers employed the full year but not making enough to get above poverty. But this group would also include people who may have had a wage sufficient to put them above the poverty level but were only employed for, say, thirty weeks. The number of people working the full 52 weeks is likely small.
Now let's add another layer. The Bureau of Labor Statistics also published Characteristics of Minimum Wage Workers: 2011.
- There were 3.9 million people who earned the minimum wage or lower. (There were 1.7 million workers that earned exactly the minimum wage. Another 2.2 million earned below the minimum wage due to exemptions like tipped work, full-time student status, and disabled workshops.)
- The median age for minimum wage workers was 24 years old.
Less than one quarter of minimum wage workers live in households that are below the poverty threshold, just under 1 million people. Note that above we said there were 4.9 million workers in the labor force for at least 27 weeks. Assuming all the 1 million worked the full year (grossly unrealistic) then only one fifth of the 4.9 million would meet the image of the worker earning a minimum wage for 52 weeks. The great majority of the 4.9 are people who worked more than 27 weeks but less than 52.
Also keep in mind that two thirds of minimum wage workers earn more a year later, the median increase being 24% according to one study. That means one third are making at least $9.00 a year later.
So here is the bottom line in dealing with poverty and employment. There were 9.4 million working adults who weren't in the labor force at all and another 2.4 million who were not in the labor force for half of the year. That is 11.8 million people. We add to this 1.6 million who were in the labor force but never found work for a total of 13.4 million people. Add 24 million dependent or disabled people in poverty to 13.4 million who weren't in labor force or who never found work, and you have 37.4 million people of the 46.2 million (81%) for whom the minimum wage has virtually no direct impact (though a small number of dependents would benefit from having a breadwinner with an increased wage.) For the remaining 8.8 million working age people in poverty the challenge appears to be insufficient hours, not the hourly wage.
Who benefits from the minimum wage is a complex calculation. Clearly it would have a positive impact on people making between $7.25 and $10.10, although to a diminishing degree as you go to the top end of that range. There would be some residual benefit to some people making more than $10.10. But here are some key observations from the CBO. There would be a $31 billion increase in wages but on 19% (about $6 billion) of this would go to poverty households while 30% (about $9 billion) would go to families who make three times the poverty level. Furthermore, CBO estimates 900,000 jobs that otherwise would have been created will not exist.
Employment is by far the key issue relating to poverty. Full-time work for 52 weeks, even with low starting wages, is the key to staying out of poverty for all but a tiny fraction of the population. The meme of the full-time minimum-wage worker working 52 hours a week while living in poverty is way overblown. The main challenge is not enough work, not too little wages. And to be sure, living just above poverty is not living in luxruy. But there are programs like Earned Income Tax Credits that could be expanded to help these low-income workers. CBO says that an increase to $10.10 is a good thing on balance. Fine. Let's go with that. But let us stop pretending that this is some monumental triumph for social justice and the elimination of poverty. Let's get some economic growth and start creating jobs. Let's invest ourselves in helping people in poverty aquire the human capital they need to flourish in a rapidly changing economy.