Would a Minimum Wage Trap People in Poverty?

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If wages for those at the bottom are high, you may naturally expect low poverty rates. No matter how you define it, higher wages would most logically relieve poverty levels. This is also the argument made by the Economic Policy Institute (EPI).

An increase in the minimum wage may very well reduce poverty in the short-term. However, there will be adjustments. In reality, a higher minimum wage changes the types of people living in poverty rather than the overall number.

Let us take a closer look at this subject of minimum wage and its impact on poverty.

Does Raising Minimum Wage help Poverty?
Does Minimum Wage hurt the Poor?
How can we Solve the Problem of Minimum Wage?
What are the Disadvantages of Raising Minimum Wage?
What is Federal Minimum Wage?
How does Minimum Wage affect higher paid Employees?
Why $15 Minimum Wage is a bad idea?
What would $15 Minimum Wage do to the Economy?
Do Minimum Wage Laws Affect Overall Poverty?
Is The Minimum Wage an Effective Way to Reduce Poverty or Inequality?
Would Raising Minimum Wage Reduce Poverty in The US?
How Does Minimum Wage Affect Poverty?
Minimum Wage And Poverty Statistics
Impact of Minimum Wage in Developing Countries
What Types of Programs Might be More Efficient in Reducing Poverty?
What Are The Negative Effects of Raising Minimum Wage?
How Will Raising Minimum Wage Help The Economy?
What Would Without Minimum Wage?
What State Has The Lowest Minimum Wage?
How Does an Increase in Minimum Wage Affect Employment?
Do Minimum Wage Laws Hurt the Economy?
Does Minimum Wage Cause a Surplus or Shortage?

Does Raising Minimum Wage help Poverty?

Raising the minimum wage in developing countries could increase or decrease poverty, depending on labor market characteristics. Minimum wages target formal sector workers—a minority in most developing countries—many of whom do not live in poor households.

Whether raising minimum wages reduces poverty depends not only on whether formal sector workers lose jobs as a result, but also on whether low-wage workers live in poor households, how widely minimum wages are enforced, how minimum wages affect informal workers, and whether social safety nets are in place.

Minimum wage increases most directly affect earnings and employment in the formal sector. Higher minimum wages lead to higher wages for formal sector workers who keep their jobs.

Studies for developing countries suggest that the positive wage effect is strongest for workers earning near the minimum wage. As a result, increases in the minimum wage tend to compress the wage distribution (equalize wages) in the formal sector.

However, increases in the minimum wage might not help formal sector workers most in need as some workers affected by the minimum wage increase already earn above the minimum wage. In Latin America the minimum wage is often used as a guide by employers in setting all wages, even those well above the minimum wage.

In addition, minimum wages might affect the wages of high-wage workers because some countries have multiple minimum wages. In Costa Rica, where wages are set by occupation and skill, a university graduate being paid the minimum wage for that category of worker would be in the top 10% of the wage distribution.

In Kenya, Namibia, Tanzania, and South Africa, where more than half of employees earn less than the lowest minimum wage, the highest minimum wages reach well into the upper half of the wage distribution.

All these effects are for workers who retain their jobs. What about employment? The evidence is mixed. The majority of studies conclude that increasing the minimum wage reduces formal employment, although the effect appears to be small in most countries.

Almost all estimates suggest that a 1% increase in the minimum wage results in less than a 1% decrease in employment, implying that the total earnings of formal sector workers increase when minimum wages rise.

Most empirical studies of the impact of minimum wages on poverty in developing countries conclude that increases in minimum wages reduce poverty, on balance, though they find only a modest impact—for two reasons.

First, a large share of workers is not covered by minimum wage legislation.
And second, higher minimum wages do not affect all low-income households the same way: minimum wages pull some households out of poverty, but may push others into poverty.

Given the potential for negative impacts on the employment status and incomes of some of the poorest families, raising current minimum wages is an inefficient tool for reducing poverty. More efficient policies would focus on

enhancing compliance with minimum wage laws,
improving incomes in the informal sector where minimum wages do not apply,
increasing the long-term productivity of workers from low-income families, and
enhancing social safety nets for workers who lose jobs when minimum wages increase.

This suggests that while minimum wages can be part of a package of poverty-reducing policies, they should not be the only mechanism or even the most important one.

Does Minimum Wage hurt the Poor?

Nonpartisan in the extreme, the Congressional Budget Office (CBO) has released a damning assessment of Congress’ Raise the Wage Act, passed by the House this past July. CBO findings, carefully hedged as always, are nonetheless conclusive.

Were the legislation to pass into law and increase federal minimum wages as planned, it would indeed boost “the income of low-wage workers who keep their jobs” but it would also add to the numbers of people in poverty by throwing many out of work and by denying means-tested benefits to others, as well as by imposing costs on many smaller employers.

The Act would raise the federal minimum wage from $7.25 an hour presently to $15 an hour by 2026. The rise would take place in steps mandated for each intervening year. Once at $15 and hour, the minimum would rise in tandem with the median wage for all workers.

The law would also raise the tipped cash minimum wage in larger steps from just over $2 on hour presently to some $12 an hour in 2026. It would then rise faster than the median wage for all workers until 2028 when it would equal the overall minimum wage, after which it, too, would rise in tandem with the national median wage.

The law would also eliminate subminimum wages for teenagers and disabled workers, insisting that they, too, earn at the legislation’s new, higher minimum

On the positive side, the CBO traces how those who keep their jobs would see a rise in their take-home pay. But the analysts also trace the negative effects.

Even the families of those still working at the higher minimum would fail to enjoy the full effect in their increased paychecks because the income hike would deny some means-tested forms of support they had previously enjoyed, such as food stamps and aid to dependent children.

To be sure, these programs are so designed that the net effect would not actually reduce family incomes, but the loss would nonetheless constrain the anti-poverty effect of the Raise the Wage Act.

Any tendency for the Act to reduce poverty would also suffer from the unemployment that a higher minimum wage would foster. And there can be little doubt that the increased employment costs imposed by such a law would prompt employers either to close their doors and so end employment for all their employees or change their operation to stay in business with fewer employees.

Any visit these days to a McDonalds, especially in high-minimum-wage states, would provide an excellent illustration of how this happens. Instead of hiring minimum-wage people to take customers’ orders, these fast food venders have turned around the screens their minimum-wage order takers once used so that now customers simply punch out their orders on their own.

They have dispensed with several minimum-wage positions. Robots are not yet flipping the burgers or delivering the food to those waiting at the counter, but they might be soon should the minimum rise according to the Act’s schedule.

This is just one illustration. The greater the relative cost of workers, the more such wage-saving solutions will multiply across all businesses, costing jobs and denying work to many.

A different way to look at these counterproductive effects lies in the legislation’s plans to eliminate subminimum wages for teens and the disabled. No doubt in today’s social climate, such subminimums must seem like a straightforward discrimination.

But that is not why they were originally put in place . The reasoning behind them was to encourage employers to hire the young and the disabled.

Employers had long avoided these groups, not out of prejudice but rather because they offered less productivity than other workers, for the young because of their lack of experience and for the disabled because they are less flexible and sometimes need special equipment.

The lower minimums were meant to overcome such employer resistance. Teens gained experience that could in time justify the higher minimum, while the disabled, it was argued, had other forms of support. The classic example is how the lower wage encouraged an employer to hire five teens on a loading dock instead of buying a forklift.

Under this law, the employer would buy the forklift and otherwise avoid workers who cannot produce at a rate that can justify paying the new higher mandated amount.

The CBO estimates that the Act could put as many as 4 million out of work, though it settles for its final calculations on a more conservative number of 1 million lost jobs.

Combining this effect with the loss of benefits to those families where the minimum wage workers continue on the job and estimates of the lost take-home pay of small employers who must bear the additional costs of the higher minimum, the CBO concludes that the Act would cause family incomes to drop in real terms by some $8 billion (in 2018 dollars) and would, all else equal, drive upwards of an additional million people below the poverty line.

In the write up, CBO analysts hasten to add that the numbers of people in poverty would nonetheless decline by some 300,000 between now and 2026 because continued moderate overall economic growth would overcome the ill effects of the Act.

The implication is that considerably more people would rise above the poverty line – almost 2 million in fact – if the economy were spared the ill effects of this legislation.

It is doubtful that the economy and the American workforce will have to deal with these effects – good or bad or indifferent. Though the Raise the Wage Act has passed the House, it seems unlikely to pass into the Senate. And if it did, President Trump would no doubt veto it.

The 2020 election might produce a result that raises the chances of federal minimum wage hikes passing into law. That, of course, is a huge unknown. But at least in such a case, the public can hope that any new legislation deals with the many aspects of this matter that the simplistic, perhaps even cynical, Raise the Wage Act ignores.

How can we Solve the Problem of Minimum Wage?

Increase The Earned Income Tax Credit

Increasing the Earned Income Tax Credit, or EITC, is a widely-proposed alternative raising the minimum wage. This federal program benefits middle- and low-income households.

According to the IRS website, the maximum amount that a family could receive annually through this program is currently around $6,000. Proponents of raising the Earned Income Tax Credit say that doing so would more effectively aid low-income families than raising the minimum wage, since some minimum-wage earners are actually teens living in middle-class households.

Guaranteed Basic Income Program

A guaranteed basic income program, also known as a universal income program, means that the government provides its citizens with an income, regardless of whether or not they work. This type of income supplement is sometimes compared to the way social security currently works in America.

Opponents of a guaranteed basic income program say that it potentially creates a disincentive to work. The Basic Income Earth Network, formerly the Basic Income European Network, is a collection of academics and economists who support this concept.

Increasing The Child Tax Credit

Households with children benefit from the Internal Revenue Service’s child tax credit program. Those in favor of increasing the child tax credit say that unlike raising the minimum wage, this strategy would directly benefit low-income families with children.

Also, like other tax-based solutions to helping low-income workers, the burden lies with the federal government, and not with businesses who they say would struggle if forced to pay higher minimum wages. The current child tax credit for low-income families who qualify is up to $1000 per qualifying child.

Training Programs

One criticism of raising the minimum wage is that if the pay rate of low-skilled and entry-level jobs is too high, workers don’t have an incentive to leave these jobs for better opportunities that pay higher wages.

By offering minimum-wage workers training, they increase the employees’ skills, which makes them more valuable to their current employer, as well as to other employers in their market.

What are the Disadvantages of Raising Minimum Wage?

Reasons against raising include:

1. Layoffs

If an employer has a tight compensation budget and the minimum wage is raised, it means they can no longer compensate the same number of employees at a higher rate and must make layoffs to remain within budget. So, while some employees may be making slightly more money, others will be left unemployed.

2. Price increase

Employers might raise prices of their product in order to generate enough income to support their more highly paid minimum wage employees, which could ultimately create a ripple effect for other shops and industries, resulting in a slightly higher cost of living, resulting in another push to raise minimum wage again.

3. Fewer Hirings

If business must pay their minimum wage employees more, they cannot afford to hire as many employees. According to a Federal Reserve Bank of Chicago study, “10 percent increase in the minimum wage lowers low skill employment by 2 to 4 percent and total restaurant employment by 1 to 3 percent.”

Or instead of hiring fewer employees, the company may start outsourcing jobs to employees in countries that are willing to work for much less than $10.10 per hour, resulting in fewer jobs for Americans.

4. Competition Will Intensify

If minimum wage increases, overly qualified individuals will be vying for minimum wage positions, pushing younger, inexperienced workers out of the running and robbing them of their opportunity to gain experience and knowledge to build a resume for themselves and enter the workforce.

5. Applied Inconsistently

Many states have their own set minimum wages, which are currently above $7.25 per hour already. As of January 1, 2014, 21 states (and D.C.) have minimum wages above $7.15 per hour (Washington being the highest at $9.32 per hour), so the amount the national minimum wage is set at varies in significance from state to state.

What is Federal Minimum Wage?

For many medium-to-small sized organizations, managing the myriad of federal compliance regulations is a top challenge. In fact, a recent Paycor survey found that 42% of organizations have negative feelings about their compliance management practices.

In most instances, compliance management falls squarely on HR’s shoulders, and with limited resources and understaffed departments, keeping up with the many changes that continue to impact the current landscape is a tall task.

That challenge is becoming even more daunting with the recent rise in local and state mandates for regulations like paid sick leave, state tax changes, pay equity laws and minimum wage increases.

To ensure your organization is aware of the latest minimum wage requirements, Paycor has created a breakdown by state.

State	2020 Minimum Wage	2021 Minimum Wage
Alabama	$7.25 (Federal, no state minimum)	$7.25 (Federal, no state minimum)
Alaska	$10.19	$10.34
Arizona	$12.00	$12.15
Arkansas	$10.00	$11.00
California	$13.00	$14.00*
Colorado	$12.00	$12.32
Connecticut	$12.00	$13.00 (effective 8/1/21)
Delaware	$9.25	$9.25
Washington D.C.	$15.00	$15.00
Florida	$8.56	$10.00 (effective 9/30/21)
Georgia	$5.15 (Employers subject to Fair Labor Standards Act must pay the $7.25 Federal minimum wage.)	$5.15 (Employers subject to the Fair Labor Standards Act must pay the $7.25 Federal minimum wage)
Hawaii	$10.10	$10.10
Idaho	$7.25	$7.25
Illinois	$10.00	$11.00
Indiana	$7.25	$7.25
Iowa	$7.25	$7.25
Kansas	$7.25	$7.25
Kentucky	$7.25	$7.25
Louisiana	$7.25 (Federal, no state minimum)	$7.25 (Federal, no state minimum)
Maine	$12.00	$12.15
Maryland	$11.00	$11.75**
Massachusetts	$12.75	$13.50
Michigan	$9.65	$9.87
Minnesota	$10.00	$10.08***
Mississippi	$7.25 (Federal, no state minimum)	$7.25 (Federal, no state minimum)
Missouri	$9.45	$10.30
Montana	$8.65	$8.75
Nebraska	$9.00	$9.00
Nevada	$8.00	$8.75 (effective 7/1/21)****
New Hampshire	$7.25)	$7.25
New Jersey	$11.00	$12.00*****
New Mexico	$9.00	$10.50
New York	$11.80	$12.50******
North Carolina	$7.25	$7.25
North Dakota	$7.25	$7.25
Ohio	$8.70	$8.80
Oklahoma	$7.25	$7.25
Oregon	$12.00	$12.75 (effective 7/1/21)******
Pennsylvania	$7.25	$7.25
Rhode Island	$10.50	$11.50
South Carolina	$7.25 (Federal, no state minimum)	$7.25 (Federal, no state minimum)
South Dakota	$9.30	$9.45
Tennessee	$7.25 (Federal, no state minimum)	$7.25 (Federal, no state minimum)
Texas	$7.25	$7.25
Utah	$7.25	$7.25
Vermont	$10.96	$11.75
Virginia	$7.25	$7.25
Washington	$13.50	$13.69
West Virginia	$8.75	$8.75
Wisconsin	$7.25	$7.25
Wyoming	$5.15 (Employers subject to Fair Labor Standards Act must pay the Federal minimum wage.)	$5.15 (Employers subject to the Fair Labor Standards Act must pay the $7.25 Federal minimum wage)

How does Minimum Wage affect higher paid Employees?

The federal minimum wage of $7.25 per hour has not changed since 2009. Increasing it would raise the earnings and family income of most low-wage workers, lifting some families out of poverty—but it would cause other low-wage workers to become jobless, and their family income would fall.

By boosting the income of low-wage workers who keep their jobs, a higher minimum wage raises their families’ real income, lifting some of those families out of poverty.

However, income falls for some families because other workers lose their jobs and business owners must absorb at least some of the higher costs of labor. For those reasons, the net effect of a minimum-wage increase is to reduce average family income.

CBO projected the distribution of family income in future years and then combined those forecasts with estimates of effects on wage rates, employment, business income, and prices.

Effects on wage rates include increases mandated by the policy as well as increases in the wages of workers who would earn slightly more than the proposed minimum wage if the policy was not implemented.

Losses in business owners’ income and consumers’ purchasing power are partially offset by an increase in the productivity of workers who receive higher wages. (That increase in productivity might occur through a variety of channels, such as a reduction in the turnover of workers.)

Why $15 Minimum Wage is a bad idea?

A large majority of economists say that raising the minimum wage to $15 an hour would result in job losses and stunt economic growth.

Supporting the bill is a persistent groundswell of grass-roots support among low-wage workers, particularly fast-food workers and members of the Service Employees of America union, SEIA.

The growing list of cities that have raised, or are considering raising, minimum wages in their jurisdictions has also added momentum to progressive Democrats’ push for a higher federal minimum wage in Congress.

The longstanding consensus, or majority, view among economists is that raising the minimum wage, whether at the local, state or federal level, will actually reduce employment, job creation and economic growth, however.

“With Congress now considering an unprecedented increase in the minimum wage, it is essential to understand the perspectives of professionals in the economics world,” EPI’s Samantha Summers said. “The survey provides much-needed perspective on economists’ views regarding a federal $15 minimum wage, and what effects it would have on the economy, jobs, and poverty levels.”

Nearly 90 percent of EPI survey respondents said the appropriate minimum wage should be below $15 an hour. Also according to the survey:

84 percent believe a $15 minimum wage will have negative effects on youth employment.
Two-thirds of economists (66 percent) believe that an appropriate federal minimum wage is $10 an hour or less.
Just six percent believe a $15 minimum wage is a very efficient means to target individuals in poverty, while 64 percent said the same thing about the Earned Income Tax Credit (EITC).
16 percent said $10 an hour would be the best level for the federal minimum wage.

Impacts of such an increase are likely to vary between urban areas, where average wages are higher, and more rural areas, where they aren’t as high, Parker told Watchdog.

“There is also a big difference between a 16-year-old with no skills trying to make some extra money after school, and a 30-year-old mother working full time, trying to support her kids,” Elliot Parker, a professor of economics at the University of Nevada-Reno, said.

In considering the legislation, elected officials will have to weigh how effective it will be in helping people pull themselves out of poverty with the very real likelihood that others would lose their jobs, Parker said.

“The literature is clear that past minimum wage hikes have reduced employment without effectively targeting individuals in poverty,” he said. “As our survey shows, just six percent of economists believe a $15 minimum wage is a very efficient policy to address the needs for low-income families, while 64 percent believe this about expanding the Earned Income Tax Credit (EITC).”

Summers said the free market is better at helping individuals improve their livelihoods.

“If the current, robust economy tells us anything, it’s that employees aren’t waiting on the federal government to give them a raise,” Summers said. “The number and percentage of people earning the federal minimum wage has dropped every year since 2010, and hundreds if not thousands of employers are paying starting wage rates at $15 or more.

Raising the minimum wage would only eliminate pathways for additional employees to work their way up the career ladder.”

What would $15 Minimum Wage do to the Economy?

In July 2019, the nonpartisan Congressional Budget Office estimated that a $15 minimum wage would eliminate 1.3 million jobs. The CBO also forecast that such an increase would reduce business income, raise consumer prices, and slow the economy.

The U.S. economy will be very weak throughout 2021. The nation will need more business income, not less; more jobs, not fewer; and faster, not slower, economic growth. A $15 minimum wage would move the economy in the wrong direction across all these fronts.

For his part, Trump said he favors a more regional approach. In “some places, $15 is not so bad,” the president said, implying it could be justified. But in parts of the country, he thinks it wouldn’t make sense.

The president is half-right. It’s a slam-dunk case that a $15 minimum wage would be devastating to low-wage workers in much of the country, even after the economy has fully recovered from the Pandemic Recession.

According to data from the Bureau of Labor Statistics, half of all workers in 20 states earned less than $18 per hour in 2019. In 35 states, the median hourly wage was less than $20. Setting a minimum wage so close to the median wage would price many workers out of the labor market. Indeed, in 47 states, 25% of all workers earned less than $15 an hour.

Trump seems to think that $15 per hour would work in higher-wage states. That’s off base, too. A team of economists, including the University of Washington’s Jacob Vigdor, have been studying the employment effects of Seattle’s move to increase its minimum wage to $15. In 2016, Seattle — a high-wage city — had hit a $13 minimum, on its way to $15.

The economists found that this led to a 9% reduction in low-wage jobs. The pay increase it generated didn’t make up for the reduction in employment, and earnings fell for low-wage workers overall. The economists’ subsequent research found that the gains from the higher minimum wage accrued to more experienced workers.

When Biden was asked at the debate whether he supports the $15 wage, he answered that he does, but he immediately pivoted to mention the Paycheck Protection Program as a way to help workers and businesses.

The PPP was enacted as part of the $1.8 trillion package passed in March to help support the economy during the pandemic. The program offers forgivable loans to businesses with fewer than 500 employees to keep their workers on the payroll and to keep businesses from going under.

The program expired in August, and Biden is absolutely right that it needs to be back up and running to support businesses and workers while the coronavirus is still raging.

Rather than reducing employment as a $15 federal minimum wage would do, my own research with economist Glenn Hubbard suggests that the PPP boosted jobs among small businesses in the early months of the program.

Biden argued that the U.S. should adopt a $15 wage floor because workers — the vice president specifically mentioned the “first responders we all clap for as they come down the street” — should not live in poverty. Set aside the specifics and focus on the general principle: Biden is right that no one who works full time and heads a household should be in poverty.

The best way to help ensure that workers aren’t in this situation isn’t through wage regulation. Instead, this goal should be pursued with resources from all of society.

By mandating higher hourly pay, the minimum wage places the burden of fighting poverty on the employers of low-wage workers and the customers of low-wage businesses. But economists, columnists, professionals and hedge funds should pitch in, too.

The federal earned-income tax credit assures exactly this. It uses tax revenue to supplement the earnings of low-income households. It reduces poverty, lifting millions of people — including several million children — out of poverty each year. Because it increases the financial rewards for working, it increases employment.

Biden has gone to great lengths to distance himself from his party’s far-left flank. In the final presidential debate, Trump tried to paint Biden as a supporter of single-payer health care in the mold of Senator Bernie Sanders. Biden responded: Trump “thinks he’s running against someone else. He’s running against Joe Biden. I beat all those other people because I disagreed with them.”

A $15-an-hour hour federal minimum wage — more the double the current minimum — is one of the few far-left policies Biden supports. But mandating it would create a huge obstacle for the least-experienced, least-skilled, most vulnerable workers in the U.S.

Do Minimum Wage Laws Affect Overall Poverty?

Supporters of raising the minimum wage argue that doing so will reduce poverty. It seems intuitive that raising the minimum wage would have this effect. Presumably, requiring employers to pay their lowest-paid employees more would lift large numbers of low-income households out of poverty. But the evidence shows that this does not happen.

Despite supporters’ good intentions, a higher minimum wage will not reduce poverty. This is true for three main reasons.

First, the only workers who benefit from a higher minimum wage are those who actually earn that higher wage. Raising the minimum wage reduces many workers’ job opportunities and working hours.

Second, few minimum-wage earners actually come from poor households.

Third, the majority of poor Americans do not work at all, for any wage, so raising the minimum wage does not help them.

The Minimum Wage Does Not Reduce poverty

Supporters argue that a higher minimum wage is an effective anti-poverty tool. If businesses must pay their low-wage employees more, then those workers should earn more and fewer of them should live in poverty. Common sense says a higher minimum wage should fight poverty.

The facts, however, show otherwise. Many economists have examined the evidence and come to the surprising conclusion that the minimum wage does not reduce poverty.

Ohio University economists Richard Vedder and Lowell Gallaway examined the effect that increases in the minimum wage had on the overall poverty rate in the United States and on the poverty rates for groups like minorities and teenagers that might especially benefit from higher minimum wages. They found that the minimum wage had no statistically detectable effect on poverty rates.

Is The Minimum Wage an Effective Way to Reduce Poverty or Inequality?

Raising the minimum wage is an important anti-poverty tool, but the current minimum wage leaves too many families in poverty. Earning the current federal minimum wage, a minimum-wage earner working 40 hours a week every week of the year would earn $15,080 over the year. This amount of earnings puts a single adult just barely above poverty.

But if that worker has to support any other people—such as a child—then this family would be living below the U.S. poverty threshold. The poverty line for a family with one non-elderly adult and one child was $16,057 in 2013. Therefore, a full-time minimum-wage earner with one child and no spouse would come up short by $977 each year.

Increasing the minimum wage would boost the earnings of low-wage workers and reduce poverty. At that minimum wage, a full-time, full-year worker would earn about $19,656 in dollars over the course of the year, assuming they never take a day off without pay, and be able to support two children as a single earner and be above the official poverty threshold.

Nearly a quarter (23 percent) of the workers who will benefit from the Fair Minimum Wage Act currently live in a family earning less than $20,000 in a year, just above the poverty threshold of $18,769 for a family of one adult and two children. Just under 52 percent of workers who will benefit live in a family making below $40,000 a year, which is closer to what many surveys show is what people believe is a basic standard of living for a family of four.

Economists have also explored with the likely effects of raising the minimum wage would be on poverty. Economist Arindrajit Dube, from the University of Massachusetts, Amherst, estimates that a 10 percent increase in the minimum wage would immediately decrease the poverty rate by 2.4 percent and lead to an overall reduction of 3.6 percent in the longer run.

According to his estimates, which in my view are empirically sound and conform with the economics literature, the Fair Minimum Wage Act will reduce the poverty rate for non-elderly Americans from 17.5 percent to 15.8 percent. On a longer time frame, past one year after the minimum wage increase, the rate would decrease to 15 percent, according to Dube.

In more concrete numbers, the increase would translate to around 4.6 million Americans no longer in poverty (or around 6.8 million if longer term effects are accounted for). Another way to contextualize these numbers is to note that the poverty rate for the non-elderly increased by as much as 3.4 percentage points during the Great Recession.

So the proposed minimum wage increase could reverse about half of that increase. Other recent research shows that an increase in the minimum wage would reduce spending on anti-poverty programs like the Supplemental Nutrition Assistance Program.

Would Raising Minimum Wage Reduce Poverty in The US?

By boosting the income of low-wage workers who had jobs, a higher minimum wage would raise their families’ real income, lifting some of those families out of poverty.

However, income would fall for some families because other workers would not be employed and because business owners would have to absorb at least some of the higher costs of labor. For those reasons, a minimum-wage increase would cause a net reduction in average family income.

How Does Minimum Wage Affect Poverty?

Raise the minimum wage to $15 by 2026 and gradually raise the tipped cash minimum to be the same as the regular minimum. Thereafter, index both wages to the median wage. Eliminate the subminimums for teenagers and disabled workers.

Effects on Employment, Income, and Poverty

	2026	2028	2031
Change in Employment in an Average Week (Millions of workers)
Mean estimate	-1.4	-1.5	-1.6
Low end	0.1	*	*
High end	-2.8	-3.1	-3.3
Number of Workers Whose Earnings Would Increase in an Average Week (Millions)
Directly affected workers	16.7	17.3	17.8
Potentially affected workers	9.8	10.3	11.2
Change in Real Annual Income by Ratio of Family Income to the Poverty Threshold (Billions of 2020 dollars)
Less than 1.0	3.8	3.6	3.7
1.0 to 2.99	3.7	3.7	4.3
3.0 to 5.99	-2.3	-2.5	-2.7
6.0 or more	-22.6	-24.8	-27.1
All	-9.8	-12.2	-13.2
Change in Real Annual Income by Ratio of Family Income to the Poverty Threshold (Percent)
Less than 1.0	2.6	2.6	2.8
1.0 to 2.99	0.8	0.8	0.8
3.0 to 5.99	-0.1	-0.1	-0.1
6.0 or more	-0.3	-0.3	-0.3
All	-0.1	-0.1	-0.1
Change in the Number of People Below the Poverty Threshold (Millions)
Mean estimate	-0.8	-0.7	-0.8
Low end	*	0.1	0.1
High end	-1.7	-1.7	-1.8

Note: Where an asterisk appears for a value, it represents an amount that is not zero but would round to zero.

Minimum Wage And Poverty Statistics

On January 16, 2019, Sen. Bernie Sanders (I-Vt.) and Rep. Bobby Scott (D-Va.) announced that they would introduce the Raise the Wage Act of 2019, a bill that would raise the federal minimum wage in six steps to $15 per hour by 2024.

Beginning in 2025, the minimum wage would be “indexed” to median wages so that each year, the minimum wage would automatically be adjusted based on growth in the median wage. The bill would also gradually increase the subminimum wage for tipped workers (or “tipped minimum wage”), which has been fixed at $2.13 per hour since 1991, until it reaches parity with the regular minimum wage.

Who would benefit if the federal minimum wage is raised to $15 by 2024?

A total of 39.7 million workers would benefit, including:

38.6 million adults ages 18 and older
23.8 million full-time workers
23.0 million women
11.2 million parents
5.4 million single parents
The parents of 14.4 million children

Impact of Minimum Wage in Developing Countries

What Types of Programs Might be More Efficient in Reducing Poverty?

To reduce poverty in developing economies, the focus may be on different policies.

Education – greater spending on education and training can enable a higher-skilled workforce.
Foreign Aid – aid from developed countries can be used to invest in better health care and education. However, some argue aid can encourage dependency.
Diversification of economy away from agriculture to manufacturing. This enables greater economic development but may be difficult to do without the right skills and infrastructure.

What Are The Negative Effects of Raising Minimum Wage?

Among the disadvantages of increasing the minimum wage is the probable consequence of businesses increasing prices, thus fueling inflation.

Opponents argue that raising the minimum wage would likely result in wages and salaries increasing across the board, thereby substantially increasing operating expenses for companies that would then increase the prices of products and services to cover their increased labor costs.

Increased prices mean a general increase in the cost of living that could essentially negate any advantage gained by workers having more dollars in their pockets.

Another projected problem resulting from an increased minimum wage is that of potential job losses. Many economists and business executives who point out that labor is a major cost of doing business argue that businesses will be forced to cut jobs to maintain profitability.

The 2019 CBO report estimates that raising the minimum wage to $15 an hour by 2025 would result in the loss of approximately 1.3 million jobs. The numbers could be substantially higher if companies made a major move toward outsourcing more jobs to less expensive labor markets outside the country.

One potentially negative impact that is less readily apparent is the possibility that a higher minimum wage would result in increased labor market competition for minimum wage jobs.

The net outcome of an increased minimum wage might be a large number of overqualified workers taking minimum wage positions that would ordinarily go to young or otherwise inexperienced workers. This could impede younger, less experienced entrants to the job market from obtaining work and gaining experience to move their careers forward.

How Will Raising Minimum Wage Help The Economy?

Raising the wages of low-income workers will stimulate the economy; substantially lower the amount the country spends on social safety net programs such as SNAP; and reduce economic inequality, thereby unleashing additional economic growth in a period of recovery.

Phasing in a minimum wage increase between 2021 and 2025 would boost consumer spending and economic growth as the country recovers from the public health and economic crises.

Different methodological approaches predict varying aggregate effects of minimum wage increases. However, calculations uniformly point toward wage increases begetting stimulus, especially wage increases for low-wage workers:

The Federal Reserve of Chicago determined that low-wage worker households spent an additional $2,800 in the year after a $1-per-hour increase to the minimum wage.
The most recent analysis from the Economic Policy Institute found that increasing the minimum wage to $15 by 2025 would generate $107 billion in higher wages. Their earlier analysis indicates that an increase from $7.25 to $9.80 per hour between 2012 and 2014 would have generated “approximately 100,000 new jobs.”
The Institute for Policy Studies calculates that for every extra dollar going into the wallet of a low-wage worker, about $1.21 is added to the overall economy.

Broad consensus in the academic research over the past 30 years has debunked the idea that raising the minimum wage causes employers to employ fewer people. Economists found that a $15 minimum wage would not reduce employment even in areas that currently have the lowest wages.

Dozens of careful studies have explored how minimum wage laws affect earnings and employment, influenced by the seminal 1994 work of David Card and Alan Krueger.

In spring 2019, prominent economists in the US and the UK published an analysis of 138 state-level minimum wage changes since 1979, finding that the overall number of low-wage jobs remained unchanged after the increase and that low-wage workers who were already earning above the minimum also saw modest wage increases.

In fact, in 2014, the 13 states that raised their minimum wages added jobs at a faster rate than the states that did not, according to the U.S. Department of Labor.

What Would Without Minimum Wage?

However, the truth is most developed countries with no legal minimum wage still have minimum wages set by industry through collective bargaining contracts. The majority of their working populations are unionized. These unions negotiate a fair baseline pay rate on behalf of the participating workers so the government does not have to do it.

Since each industry may require vastly different things from its employees, it makes sense the minimum wage varies from business to business. Five developed nations without legal minimum wage requirements are Sweden, Denmark, Iceland, Norway, and Switzerland.

1. Sweden

Sweden is often touted as the poster-child for abolishing the minimum wage. However, the Nordic nation using a Nordic model is certainly no free-market free-for-all. Instead, minimum wages are set by sector or industry through collective bargaining. Their currency of choice is the krona.

Nearly all Swedish citizens belong to one of about 60 trade unions and 50 employers’ organizations that negotiate wage rates for regular hourly work, salaries, and overtime. The minimum wage tends to hover near 60% to 70% of the average wage in Sweden.

Swedish law limits the workweek to 40 hours, just like in the U.S. However, it also dictates that all workers are entitled to 25 paid vacation days and 16 additional public holidays each year, far more generous than the U.S. standard.

2. Denmark

Relations between workers and employers in Denmark have been deemed downright harmonious due to the lack of a federally mandated minimum wage.

Once again, trade unions take care of ensuring that workers are paid a reasonable wage and seem to be doing a fine job of it, keeping the average minimum wage across industries at a healthy $20 per hour.

3. Iceland

Iceland does not receive very much attention except for its breathtaking scenery. However, this tiny island nation consistently ranks among the happiest countries on earth, along with every other nation listed here, because of its low crime rates, high wages, and happy, healthy populace. People like to retire there.

Employees in Iceland are automatically enrolled in trade unions, which are responsible for negotiating baseline salaries for the industries they represent.

A recent Gallup poll showed nearly unanimous support for a plan put forward by the Icelandic Professional Trade Association to increase the negotiated minimum monthly wage to ISK 300,000, or roughly $2,233, within the next three years.

4. Norway

Norway is yet another northern nation that has eschewed a federally mandated minimum wage in favor of having union-negotiated wages set by industry. Norwegians enjoy good job security, healthy wages, and ample vacation time.

Basic hourly wages vary by industry. However, unskilled workers in the agriculture, construction, freight transport, and cleaning industries, for example, earn minimum rates ranging from $16 to $21 per hour, with increases based on experience and skill level.

5. Switzerland

Switzerland saw a proposal for a legally enforced minimum wage soundly rejected in 2014. The decisive vote against a $25 per hour base salary was touted as evidence the Swiss do not want or need government intervention, which might cause low-wage workers to lose jobs if employers are unable to pay more.

However, Switzerland also relies heavily on trade unions and employee organizations to negotiate fair wages for each industry, meaning 90% of the Swiss earn more than the proposed minimum anyway.

What State Has The Lowest Minimum Wage?

According to the U.S. Department of Labor, the federal minimum wage for covered nonexempt employees is $7.25 per hour.

This sum has remained the same since the last increase on July 24, 2009, when it rose from $6.55 to $7.25, the last step of a three-step increase approved by Congress in 2007.

Previous to this, the minimum wage had stalled at $5.15 per hour for 10 years.

Many states also have minimum wage laws in place. In situations where both the state and federal minimum wage laws apply, the employee is entitled to the higher of the two minimum wages.

The state currently with the lowest minimum wage requirements as stated in data from the DOL is Georgia. Paying just $5.15 per hour, Georgia has a minimum wage of more than $2.00 below the federal mark of $7.25.

The state with the second-lowest wage is Wyoming with a minimum hourly pay rate of $5.17. And at the other end of the spectrum, the state with the highest minimum hourly wage is California at $12.

How Does an Increase in Minimum Wage Affect Employment?

The potential benefits of higher minimum wages come from the higher wages for affected workers, some of whom are in poor or low-income families. The potential downside is that a higher minimum wage may discourage firms from employing the low-wage, low-skill workers that minimum wages are intended to help.

If minimum wages reduce employment of low-skill workers, then minimum wages are not a “free lunch” with which to help poor and low-income families, but instead pose a trade-off of benefits for some versus costs for others. Research findings are not unanimous, but especially for the US, evidence suggests that minimum wages reduce the jobs available to low-skill workers.

Higher minimum wages are becoming the norm in many countries. Although a minimum wage policy is intended to ensure a minimal standard of living, unintended consequences undermine its effectiveness. A good deal of evidence indicates that the wage gains from minimum wage increases are offset, for some workers, by fewer jobs.

Furthermore, the evidence on distributional effects, though limited, does not point to favorable outcomes from minimum wage hikes, although some groups may benefit. Other mechanisms, such as earned income tax credits, appear more effective at helping low-income families.

Do Minimum Wage Laws Hurt the Economy?

It is clear from theory and evidence that minimum wage mandates hurt people and, likely on net balance, by more than those helped by it. Yet many wish to believe otherwise.

Commanding a higher wage level from Washington, D.C. will not increase the value low-wage employees create and may lead managers to cut jobs that are not worth the extra expense. That means greater unemployment and a loss of opportunity, often for those folks who most need jobs and the experience they provide.

A letter from the Competitive Enterprise Institute makes five key points: 1) A standard minimum across the entire U.S. will harm some areas more than others; 2) Minimum wage laws harm more poor people than they help; 3) They increase unemployment; 4) They deprive young people of work experience; and 5) They harm the overall economy.

Minimum wages sound nice but policy doesn’t happen in a vacuum. Choices made by distant politicians have consequences, unintended and otherwise.

A higher minimum wage, the evidence shows, often lead to a wage of $0. As many companies are forced to retrench due to higher costs, employment rolls are trimmed, starting with the least productive workers, who are often also poor or young and trying to get work experience.

Does Minimum Wage Cause a Surplus or Shortage?

In the case of the minimum wage, a surplus means that workers will seek to supply a greater number of labor hours than employers will demand, resulting in an increase in unemployment.

Price ceilings cause shortages in the market. In the case of rent-controlled apartments, a shortage means there are fewer apartments available than the number of apartments people want, resulting in some people having to share housing or move farther away.

Two things happen when the government imposes a minimum wage:

The amount of labor hired in the market decreases. In our example, the number of unskilled workers employed decreases from 1,000 to 800. Thus while those who have jobs earn a higher wage, there are now some individuals who no longer have jobs. Employment has decreased.
At the government-imposed wage, there are more people who want to work than are able to find jobs. Thus the minimum wage has created unemployment. Because 1,250 people would like jobs at a wage of $5 but only 800 jobs are available, 450 people are unemployed; they would like a job at the prevailing wage, but they are unable to find one.

The number of unemployed workers is 450, even though employment decreased by only 200 workers. The difference comes from the fact that the higher wage also means that more people want to work than before. In this case, the higher wage means 250 more people would like a job.