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Publication . Article . 1997

Do Minimum Wages Fight Poverty?

Neumark, David; Wascher, William;
Open Access  
Published: 01 Aug 1997
Abstract
I. INTRODUCTION One of the most compelling rationales for a national minimum wage floor is to raise the incomes of poor or near-poor families with members in the workforce. This general point, however, is often missed in the debates over the merits of a higher minimum wage. In contrast to these oft-stated distributional goals, much of the focus in such debates has been on the employment effects of minimum wages--especially among the teenage population. In large part, this focus is probably attributable to the extensive body of economic research on the effects of minimum wages on employment of low-skilled workers. However, although negative employment effects represent a cost of minimum wages, such costs do not necessarily imply that minimum wages constitute bad social policy. In particular, the employment losses associated with a higher minimum wage may be more than offset by positive effects on low-income families, especially if minimum wages are a significant factor in helping move families out of poverty. (1) This is not to argue that research on employment effects of minimum wages is irrelevant. But such research may be more important as a test of the theory of labor demand and as a method of learning how employers and individuals adjust to exogenous wage increases than as a method of assessing the wisdom of the policy. In addition, we do not mean to suggest that the short-run effects of minimum wages on the incomes of poor families should be the sole criterion for evaluating such policies. Other studies have found evidence suggesting, for example, that minimum wage increases reduce school enrollment rates and training (Neumark and Wascher, 1996a; Hashimoto, 1982), factors that may affect longer-run earnings or earnings growth; these deleterious longer-run effects might offset the benefits of shorter-run effects of minimum wages on family incomes. Nonetheless, our perception is that potential increases in the incomes of poor families provide the main motivation for raising the minimum wage, making it important to assess the evidence on whether minimum wage increases achieve this goal. In this regard, there are two questions that pertain to the influence of minimum wages on family incomes generally and on poverty in particular. First, there is the question of the effects of minimum wages on low-wage workers--that is, do the wage gains received by employed workers more than offset the lost earnings suffered by those who lose or cannot find jobs? (2) Second, there is the question of how minimum wages affect workers in different parts of the family income distribution. Because many (roughly speaking, a large minority of) minimum wage workers are in relatively affluent families (Gramlich, 1976; Card and Krueger, 1995; Burkhauser et al., 1996), which workers gain and which lose will have an important influence on the effects of minimum wages on the distribution of family incomes. In this article we present evidence on the effects of minimum wages on family incomes, focusing in particular--but not solely--on the effectiveness of minimum wages in reducing poverty. Using matched March Current Population Surveys (CPSs), we estimate the effects of minimum wages on the probabilities of various transitions in the family income distribution, such as transitions into and out of poverty. Given that federal changes in minimum wages may be confounded with other aggregate-level shocks influencing family income, we rely heavily on state-level changes in minimum wages to identify minimum wage effects. In a nutshell, our empirical strategy is to compare rates of transition through the family income distribution in states in which minimum wages do and do not increase. For example, if poor families are more likely to escape from poverty when minimum wages increase in their states of residence, we would infer that minimum wage hikes help families move out of poverty. On the other hand, if transitions in to poverty are more common when minimum wages increase, we would infer that the disemployment effects of minimum wages play a dominant role among the low-income population. …
Subjects by Vocabulary

JEL Classification: jel:J38 jel:K3

Medical Subject Headings: health care economics and organizations

Microsoft Academic Graph classification: Labor demand Demographic economics Wage media_common.quotation_subject media_common Minimum wage Population education.field_of_study education Economics Earnings growth Earnings Family income Poverty

Subjects

Economics and Econometrics, General Business, Management and Accounting