Last time I wrote about how in reality, the minimum wage in America is so low that it can’t even get the average person working full time earning it out of poverty. It is low enough that some think it may be acting as a barrier to social mobility, a defining trait of the United States. By considering what has happened in the past after wage increases, it will be clear that the only negative effects of increasing the minimum wage is on measurements of poverty.
While It seems obvious that increasing the minimum wage would decrease poverty (the wages increased, not the poverty level), there are those that argue it will have a negligible affect, since many poverty stricken people don’t work for the minimum wage. Even though the increase can’t end poverty, as we will see, it can have an effect on it, and can therefore be an effective tool for addressing it. Economic theory also predicts that with an increase in the price of labor the demand for labor would decrease, resulting in lost jobs. This notion is not consistent with past results of minimum wage increases.
First, Consider Washington, the state with the highest minimum wage in the country at $9.32/hr., with future increases tied to the consumer price index. Surely such an extreme example should support the assertion that increasing the minimum wage results in lost jobs. In the 16 years since the law went into effect, Washington has been above the national average with respect to job growth.
Perhaps Washington was a fluke. An even more extreme example can be found in San Francisco, which has gone to an inflation adjusting $10.74/hr., the highest minimum in the country at any level. In addition it has laws requiring paid sick leave and health care spending. What it doesn’t have is the predicted job loss. This can be seen in the following graph, which tracks the effect on the San Francisco restaurant industry, which employs the largest amount of minimum wage employees.
As can be seen, it tracks the surrounding counties quite well, showing no large deviation, except perhaps a small increase of hiring after the addition of paid sick leave. Since San Francisco’s minimum wage laws don’t bind the surrounding counties, it is clear that the increased minimum wage, along with other benefits, have not resulted in job losses. If two of the most extreme cases of minimum wage increases have not resulted in less jobs, there is little support to think that lesser hourly rates would result in any significant losses.
There are less surprising results for the economy, government spending, and businesses. In this letter from the Chicago FED the effects of a $1.75 hike in the minimum wage are analyzed. It finds that such an increase could lead to an increase in aggregate household spending, even after accounting for spending that was lost to increased costs. Additional research also estimates that an increase in the minimum wage could result in a decrease in government spending for the SNP program (food stamps). A growing collection of research shows that businesses that pay a higher wages receive less theft, higher productivity, and increased worker retention.
Having seen that increasing the minimum wage won’t harm society, we consider the economic outcomes of the workers themselves. Research by Dube provides insight into how such increases have affected workers in the past. Tracking the effects of the minimum wage on the distribution of family income from 1990 to 2012, he finds that the coefficient on the elasticity of the poverty rate is a statistically significant -.24. Also statistically significant (at the 1% level) is the -.32 and -.96 coefficients on the poverty gap and gap squared terms, measures of how poor the poorest families are. This provides evidence that “…minimum wage increases do not reduce poverty by merely pushing some families above the poverty line, but rather by increasing incomes substantially and further below the poverty line.” More concisely, increasing the minimum wage decreases the portion of the population in poverty, as well as the depth of poverty.
Increasing the minimum wage is one of the most effective tools the federal government has to fight poverty. The minimum wage should be increased to at least the same $10.10 an hour earned by federal contractors. Past experience has shown that this will not result in the job loss that is threatened by businesses. It is time for the United States to take the steps needed to guarantee that a full time worker makes a wage they can live on.