How effective is the minimum wage at supporting the poor?

The highly esteemed and extremely proficient Thomas MaCurdy has a new piece in the JPE (jstor) on exactly that question.  The news does not surprise me:

This study investigated the antipoverty efficacy of minimum wage policies.  Proponents of these policies contend that employment impacts are negligible and suggest that consumers pay for higher labor costs through imperceptible increases in goods prices.  Adopting this empirical scenario, the analysis demonstrates that an increase in the national minimum wage produces a value-added tax effect on consumer prices that is more regressive than a typical state sales tax and allocates benefits as higher earnings nearly evenly across the income distribution.  These income-transfer outcomes sharply contradict portraying an increase in the minimum wage as an antipoverty initiative.

MaCurdy also writes:

About 35 percent of the total increase in after-tax benefits goes to families with income less than two times the poverty threshold, a common definition of the working poor or near-poor; nearly 13 percent goes to families principally supported by low-wage workers defined as earning wages at or below 117 percent…of the new 1996 minimum wage; and only about 14 percent goes to families with children on welfare.

Unlike most public income support programs, increased earnings from the minimum wage are taxable.  Over 25 percent of the increased earnings are collected back as income and payroll taxes…Even after taxes, 27.6 percent of increased earnings go to families in the top 40 percent of the income distribution.

File under “Scream it From the Rooftops!”  I do not see an ungated copy, but here is an earlier 2000 paper (pdf) by MaCurdy, with O’Brien-Strain, with broadly similar conclusions.

From that same JPE issue, cream skimming effects seem to be pretty small when it comes to school choice.

Comments

'and suggest that consumers pay for higher labor costs through imperceptible increases in goods prices'

Sounds like redistribution to me. The exact same thing that happens when unions bargain for higher wages for workers. And we all know that workers bargaining for higher wages is the sort of thing that will not help an average is over world come into being. Witness the fierce opposition to restricting union activity in the socialist hellhole that is Germany, and look at the result.

Whereas when CEO compensation is increased, obviously consumers do not pay for higher CEO costs through 'imperceptible' increases in goods prices. That would be against the prevailing narrative, and should not even be whispered.

In some respects higher minimum wages and stronger unions are indeed substitutes for each other. Both raise wages for insiders are the costs of outsiders. On this point we have had a lot of anguish about stagnant productivity in recent times, especially compared to, say, the 1970's. It occurs to me that perhaps the slower productivity growth is due to the decline in union strength as manufacturers don't bother to invest now in labor saving technologies as much due to lower incentives. Even though I am strongly in favor of free markets, maybe union's and higher minimum wages are required to force manufacturers to invest in productivity improvement mechanisms, which eventually make us all wealthier.

Interesting point.

You mean, unions make labor inefficient, and thus spur employers to use less of it?

I would think that CEO pay is determined by profitability after taking into account labor costs and the market price that you can sell the product at. No company is just going to raise it's prices just so they can pay their CEO more. Not unless they are in a monopoly situation and they don't care about competition. Or because they are desparate for a CEO and can't find one willing to work for the measly millions they were previously going to pay.

If the profits in the industry are consistently high enough to pay CEOs salaries that wildly exceed the market price, that points to a problem with limited supply driving prices up substantially beyond marginal costs. So what are the supply constraints?

There are roughly a million times as many workers as there are CEOs of major companies.

Is slavery OK if slaves derive benefits from belonging to rich households?

The best defense against "wage slavery" is lots of jobs. Then if you are unhappy with your employer you can move to another one easily. Minimum wage restrictions reduce the number of jobs, so unhappy employees then have less alternatives.

"Wage slavery" is a fallacious attempt to associate relative economic well-being with an absolute moral evil and there for create a moral imperative to do something about it. This should be rejected out of hand.

Having few options in one's life, and therefore being stuck in a low-paying job, is a lamentable situation, but it is not a situation that is intentionally, directly imposed on one individual by another. Calling this slavery is like confusing death by natural causes with murder--both are tragic, but the lessons one should draw from each are quite different. Also, using the language of "slavery" implies the employer is to blame without having to present any actual evidence of exploitation.

Agreed. Lets call it wage rape instead. That should take care of the issue.

Meh. Why such a bland term? We need people fired up and emotional, so they can think clearly.

We need to teach employers not to wage rape. We live in a wage rape culture.

This could work...

"Women only get .70 wage rapes for every one a man gets!"

I know shouldn't have been laughing at the end that thread....but...

i'm scared the algorithms are giong to find me... and I'll get 0.15 wage raped via demotion.

I agree there are issues with the concept of "wage slavery" (not least of which that it was basically proposed to legitimize chattel slavery in comparison with the industrialized north) but as for these particular points couldn't you say the same of chattel slavery? The slave owner buys his slave at the market, he does not make the slave or the circumstances that make him a slave, he does not impose slavery on the slave, he just profits from those circumstances. Similarly the business owner does not make the low-wage worker or the circumstances that determine his fate and yet he profits from those circumstances. Although both the slave owner and the business owner are the most likely to have the power to create change for the slave or the low-wage worker each is disincentivized to do so.

If there's a wage there's no slavery. A "wage slave" is free to walk away at any time, an actual slave is not. Just because people don't like something but stick with it because they fear the alternative would be worse does not make it slavery. They could always head up to the Bakken, right?

No. A person who owns a slave is directly, intentionally imposing slavery on that person.

We're all slaves to reality, and this is the fundamental flaw in progressive politics and positive rights.

Positive rights is flawed concept with a scarry can of worms attached to it. Progressive politics in it's current form has little to do with progression or transformation really, and allot to do with advancing group interests. I think the most progressive movement in America nay THE WORLD, is one promoting a solid education in economics from kindergarten onwards. But i'll admit i'm to much of geezer to really know where the face of realities payload is.

"....after taxes, 27.6 percent of increased earnings go to families in the top 40 percent of the income distribution. "

So , 72.4% of the increased earnings go to the bottom 60% of the distribution. That's VERY progressive , especially compared to other policy changes that've been made over the past few decades , which directed nearly all of the benefits to the top , e. g. the tax preferences and such described here :

http://www.nytimes.com/2015/03/18/business/economy/taxes-take-away-but-also-give-back-mostly-to-the-very-rich.html?smid=tw-share&_r=0

So you think 72.4% for the bottom 60% is VERY progressive? If you're going to be progressive, how about something like 72.4% for the bottom 20%? Wouldn't that be better in your world or would that be just too much disincentive for workers?

Bottom 20% would consist mainly of unemployed, or people unable to find a job -> so you need a minimum guaranteed incomed to reach them

Thus paying people to work less. Unfortunately, the prog mind is utterly incapable of seeing why that's a bad thing.

So you think they are unemployed by their own will?.... Ask an unemployed person in his/her 50's for instance...

"I'm not willfully unemployed, I just demand a salary that no one thinks I am worth." - Every unemployed person in Moreno's fantasies.

People who pay few income taxes have few income tax deductions? What a scandal!

Think of it as targeting, poorly. The justification for raising the minwage is to help the poor. Designing in a 30% waste is stupid. EITC is probably the way to go here even though there is massive gaming going on.

It is progressive but not quite very progressive. However what would be much more progressive is continued expansion of the Earned Income Tax Credit and direct transfers to the working poor. EITC provides extra cash and Medicaid can provide health coverage and then the employer of someone making min. wage doesn't have to be made to bear the burden of income redistribution.

Unfortunately, since the former items are clearly on the budget they are easy targets for Repbulicans who will then target the min. wage for all the usual classical economic reasons. In a better world a grand bargain would swap less min. wage for more EITC and other benefits.

A quick word on EITC: $55 billion amounts to 1/3 of 1% of GDP. Given median wage is $26,000 and minimum needs line for a family of three more like $50,000 * -- given that half the individuals in the workforce are earning half minimum needs for a family -- or a lot less: moving 1/3 of 1% of GDP around is not going to have a (literally) measurable effect on poverty (lost in the noise).

* Quick look: $11,000 silver plan for a family of four (close enough -- Brill, p. 346), $4,000 payroll taxes on 50K, $15,000 rent and utilities -- and we haven't even put the dried beans in the pot of water to soak overnight **.

** Official federal poverty line based -- only -- on 3X the price of an emergency diet -- dried beans only please; no expensive canned! :-)

The rich pay most of the taxes and receive little of the benefits, so no it is not progressive compared to the rest of the system. It reduces the progressiveness of government

Can't have a minimum wage without a maximum wage.

Yes, we should turn back to slavery. That would be fantastic for the 80% of the world population. The rest could live in the Moon breathing fresh air.

Or we can tax the great fortune and forgive tax heavens.

>>allocates benefits as higher earnings nearly evenly across the income distribution >>

>>Even after taxes, 27.6 percent of increased earnings go to families in the top 40 percent of the income distribution.>>

An argument in favor of increasing the minimum wage is that it helps those further up the income scale, not just the direct beneficiaries. The paper seems to support that argument.

I have not heard that justification. If it makes it harder for my teenager to get a job, how does that help?

You have to work more hours to support said teenager, so your income goes up!

Just try to introduce minimum beer prices to support the beer industry. (Impeccable logic.)

Yes, comparing people to beer is very logical ;)

Yeah, absurd. On the whole, beer is far more interesting on subjects of public debate.

I'm on a Burkean roll today (see the guest editorial in today's NYT by Professor Lane of Princeton about class conflict), so I'll cast my vote against the minimum wage. That's not to say I oppose public programs to assist the poor, but it seems that a minimum guaranteed income would be preferable to a minimum wage in that the former in effect punishes labor. I know, labor is punished in many ways, not least by payroll taxes and group health insurance (even if the incidence is primarily on employees), but just because labor is punished in some ways doesn't justify punishing labor in others. I'll go further and suggest that if capital ought not be punished with taxes, neither should labor - indeed, the case for not punishing labor is greater. Of course, that is a circular argument, as somebody or something has to be taxed and taxed in a manner that is deemed "fair", it's just that those with political power (read wealth) have the most influence on who or what gets taxed. In the end, the goal, as Edmund Burke would argue, is social cohesion and stability.

+1 "it’s just that those with political power (read wealth) have the most influence on who or what gets taxed"

Better: "those with political power (read wealth or captive votes)"

So why exactly did they choose to tax themselves?

I meant "the latter" (minimum wage) not "the former" (MGI). I wasn't quite awake yet.

How about we tax consumption. We are trying to move some consumption from private to public purposes. We can tax consumption progressively.

So *reducing* the minimum wage would help. Is there a lower bound?

Indeed there is. As the New York Times (!, yes) editorialized some years back it is "Zero."

Slavery

There should be a Godwin's Law for invoking slavery.

Nobody said compulsory. Try Volunteering.

"Life demands calories! So all paid work is slavery" - Morono Cluus

Less than zero if we bring back debtors prisons.

Alex that is your cue to talk about Ferguson and other predatory municipalities.

What's university if not paying to work?

Sorry, there are tweets anonymous Alan's posting on this thread.

Another reason why it's not clear why anyone would support a minimum wage vs. a direct transfer like a higher EITC or negative income tax. I suspect a lot of support from the minimum wage is rooted in anti-business sentiment rather than anti-poverty sentiment.

Yes. Out of 'fairness', as someone once said in a presidential debate.

To be charitable would be to assume that some people do not like people who pay low wages, though the min wage on falls on then in the short run, in the long run it falls on the consumers.

Higher minimum wages are associated with greater financial well-being

http://blogs.lse.ac.uk/europpblog/2015/03/18/higher-minimum-wages-are-associated-with-greater-financial-well-being/

Last paragraph finally get around to it : "Although correlation does not prove causation"
and "the evidence we have assembled strongly suggests that higher minimum wages do indeed work"

No it does not, and more likely the evidence show causation going in the other direction.
See, I just made an assertion backed up by nothing. I should be publishing this stuff.

Although correlation does not prove causation, correlation proves causation.

Asset bubbles are also associated with a booming economy.

The best anti poverty measure would be for citizens to regain the right to innovate and improve the systems, resources, goods and services they use now.

Who doesn't have a right to innovate?

Most individuals who use knowledge for services, do so by already existing dictates. Same circumstance for housing and infrastructure.

"Who doesn't have a right to innovate"

Has never heard of laws.

Reading the paper now. One thing jumped out at me:

As one moves up the income distribution, the costs begin to outweigh the benefits, so that the average family in the highest income quintile pays $154 more in costs than it receives in benefits. However, high-income families with a minimum wage worker still averaged more in additional earnings than they paid in higher prices.

By analyzing it on the level of families rather than the level of individuals, they can claim benefits go to the "high income families."

Family gross earnings and income are raised by the combined increase in earnings of all family members; this change in family earnings is the pretax benefit and is calculated as follows. For each worker in the family identified as earning an hourly wage below the new legally specified minimum wage level in 1996, the analysis assumes that his or her hourly wage rises to the new minimum, that is, from as low as $4.25 (the old minimum) to exactly $5.15 (in 1996 dollars). The computations use the new wage rate and annual number of hours worked to calculate the implied increase in total earnings for each worker during the year assuming that there is no change in hours of work. For workers earning less than the old minimum wage of $4.25, the analysis assumes that they also receive a $0.90 wage increase, which does not bring them up to the full $5.15 per hour. The computations assume no spillover benefits for workers already earning more than the new minimum wage.

My minimum wage increase proposal would be an increase of much greater magnitude, to 12-15$ an hour from it's current level. And I would assume spillover benefits, by basic logic. If you have someone making 10.30$ an hour, and the minimum wage is 7.25$ an hour, he makes more the minimum age because he has higher bargaining power. If the minimum wage is suddenly raised to 10.00$ an hour, it should be easy for you to see why his wage should be expected to rise. Determining by exactly how much is not a straightforward process, but they could have created some BS equation to model it.

To highlight the distribution of benefits across family income, panel A of table 1 segments families into five income quintiles and reports the average levels and distribution of benefits (i.e., higher earnings) across these quintiles. For each quintile, column 5 shows the share of families that include one or more minimum wage workers (i.e., those who benefit from the minimum wage increase). The result is perhaps surprising for those unfamiliar with similar findings in the literature. The minimum wage population is almost equally distributed across the income distribution. While 22.3 percent of all families have one or more minimum wage workers, only slightly more (22.6 percent) families in the lowest quintile include low-wage workers and therefore benefit from the minimum wage increase. This is nearly identical to the 22.7 percent of families in the highest income quintile that have a worker who benefits from a minimum wage increase. Thus, approximately one in five families benefit, regardless of their income.

https://www.jstor.org/literatum/publisher/jstor/journals/content/jpoliecon/2015/679509/679626/20150312/images/large/tb1_1.jpeg

So they claim that a "high income family" is just as likely to include a worker who "benefits from a minimum wage increase." I suppose this is plausible, an upper class family with a son in college who works at McDonalds benefits while a similar lower class family has a son who sits around all day watching tv and doing drugs does not. Assuming this data is accurate I still think it would be socially beneficial if the son in college made more at his McJob at the expense of his insurance salesman father. On the level of individuals rather than families, this is redistributive. But they wouldn't be able to claim that it "benefits as higher earnings nearly evenly across the income distribution," if the wage increase was higher and spillover effects were accounted for. For the bottom quintiles, everyone who works would benefit. The ones who don't work would not benefit, it might motivate them to work.

These poor wretches earning minimum wage are lucky to have any jobs at all. Only people with high three digit IQs and a solid grasp of advanced mathematics should be able to provide for themselves and their families. I have been told that the minimum wage can double and prices wouldn't move much because labor is a very low component of total cost but I refuse to pay a penny more than I have to because I went to a top five university and understand the Coase theorem. Eff the poor

These poor wretches earning minimum wage are lucky to have any jobs at all

If not today, than quite likely in the future, as robots take their jobs, creating new jobs in the economy that require high IQ.

Of the two ways of dealing with this:

a) create a system where people with low job skills can still contribute to society while having a non-poverty lifestyle, while providing a pathway up if they want to dedicate time and energy to higher wages, vs

b) shut our eyes and ears and demand that it is employers fault if they cannot find $15/hour employment for every person with a pulse

"b" is much less cruel to the low-skill worker.

and by "less cruel" I mean "more cruel"

Or in the words of Ted X presenter Sam Hyde.

"We're just gonna kill'm!"

I bet you call yourself a Christian.

If taxes on high consumption people to finance a much higher EITC (or ECTC) were not off the table for Republicans, there would be no reason to propose a minimum wage.

Or just cut the enormous defense budget, or agriculture subsidies, or etc. But the party of small government is anything but.

Only comparatively. A third party would be nice.

The GOP is better at being the party of small government when it is not in power:

http://econlog.econlib.org/archives/2015/03/will_the_gop_on.html#comments

Yes, the EITC is better, but you are naive if you think anything will ever stop the minimum wage chorus. If one thinks evil KKKorporations could always find more money to pay wages, that person will never stop asking for MW hikes.
It's about hating the wealthy and successful businesses that aren't green energy or organic food producers for too many of these people to change their tactics. Their dog whistle is the word "fairness".

Its almost like the side supporting ever higher MW's seems to like having it as a perennial go-to issue. EITC is an R-supported and invented idea so it must not help poor people.

"The news does not surprise me:"

Mood affiliation ?

http://www.forbes.com/sites/timworstall/2014/12/05/who-really-pays-for-a-higher-minimum-wage-the-workers-and-consumers-not-the-employers/

I've read about this curious concoction of calculations before (above) -- equating minimum wage caused price increases with a VAT increases. Tim Worst of All (a.k.a., Worstall) reported the so-called "study" looks at what approximates a $15 minimum wage increase:

"There’s quite a lot of interest in the full paper. The rise in the minimum wage took it from 35% of the median wage to 55% of the median wage (so, from about the same level as the US minimum wage is today to a little bit less than that $15 an hour demand would take the US one) and yet they found very little effect on employment as a result."

Say, that would raise Walmart average wages (average $12.50 claimed for part and full time) to $17.50 -- 50%. Say, that would raise the cost of GDP output 3.5% -- which it would: average $8,000 raise (half the distance from $7.25/hr to $15/hr) X 70 million employees (45% of workforce + 5% for those on min now) = $560 billion (10 X EITC).

Somehow I don't see a 3.5% rise in retail costs (or is that 5% -- retail being 2/3 of economy; personal income also 2/3 -- never been able to work through that "Escher staircase" -- anybody?) taking back much of that 50% raise. If so, labor has found the magic answer to a better life: LOWER its prices across the board in the labor market, and keep lowering it until it has found a (low) level at which it is satisfied. :-)

Fast food workers would nearer to double their wages. Pretty hard to take that back. Fast food prices would climb 25% but 2/3 of Ronald's customer come through the driver thru still have to eat (peanut butter sandwiches?) and the other 1/3 will be enjoying an $8,000 average raise. Did I mention: Walmart prices would climb a few percent.

All sounds too good to be true -- until you consider this chart (hope it loads right):

yr..per capita...real...nominal...dbl-index...%-of

68...15,473....10.74..(1.60)......10.74......100%
69-70-71-72-73
74...18,284.....9.43...(2.00)......12.61
75...18,313.....9.08...(2.10)......12.61
76...18,945.....9.40...(2.30)......13.04........72%
77
78...20,422.....9.45...(2.65)......14.11
79...20,696.....9.29...(2.90)......14.32
80...20,236.....8.75...(3.10)......14.00
81...20,112.....8.57...(3.35)......13.89........62%
82-83-84-85-86-87-88-89
90...24,000.....6.76...(3.80)......16.56
91...23,540.....7.26...(4.25)......16.24........44%
92-93-94-95
96...25,887.....7.04...(4.75)......17.85
97...26,884.....7.46...(5.15)......19.02........39%
98-99-00-01-02-03-04-05-06
07...29,075.....6.56...(5.85)......20.09
08...28,166.....7.07...(6.55)......19.45
09...27,819.....7.86...(7.25)......19.42........40%
10-11-12
13...29,209.....7.25...(7.25)......20.20?......36%?

Correction: which everybody would notice anyway: $5 increase in Walmart $12.50 average wage would add 40% -- not 50%.

yr..per capita...real...nominal...dbl-index...%-of

68...15,473....10.74..(1.60)......10.74......100%

69-70-71-72-73

74...18,284.....9.43...(2.00)......12.61

75...18,313.....9.08...(2.10)......12.61

76...18,945.....9.40...(2.30)......13.04........72%

77

78...20,422.....9.45...(2.65)......14.11

79...20,696.....9.29...(2.90)......14.32

80...20,236.....8.75...(3.10)......14.00

81...20,112.....8.57...(3.35)......13.89........62%

82-83-84-85-86-87-88-89

90...24,000.....6.76...(3.80)......16.56

91...23,540.....7.26...(4.25)......16.24........44%

92-93-94-95

96...25,887.....7.04...(4.75)......17.85

97...26,884.....7.46...(5.15)......19.02........39%

98-99-00-01-02-03-04-05-06

07...29,075.....6.56...(5.85)......20.09

08...28,166.....7.07...(6.55)......19.45

09...27,819.....7.86...(7.25)......19.42........40%

10-11-12

13...29,209.....7.25...(7.25)......20.20?......36%?

Note that the early 2007 minimum wage (still $5.15 nominally) UNDERPERFORMED MALTHUS! Pre-industrialization (that's the, er, Industrial Revolution) if population climbed from, say, 200 million to 300 million, then, wages would be expected to drop 1/3 -- not almost 1/2!

Post Industrial Revolution, OTH, if productivity doubled over 50 years, barbers and burger flippers could (physically -- i.e., it would be possible) expect to get paid about twice as much.

"Stop trying to manipulate the labor market with minimum wage laws!" screams tenured professor, whose salary is supported by federal student loans, from the rooftops.

+1

I believe it is also a state university.

Funny how that works out.

It's kind of like that old saying:

Freedom for me, but not for thee!

His position isn't wrong just because he happens to work at an institution that is subsidized by the government.

No it is just wrong.

You mean tenured professors should only support progressive politics? The academia agrees with you and is attempting to correct this, right now.

If Tyler had won the lottery would it be appropriate for him to be extolling the virtues of hard work?

"Whereof one cannot speak, thereof one must be silent."

So you think Tyler supports federal student loans? Do you?

Says the person not making any actual counter points...

More regressive? I just heard Texas now wants to scrap its sales tax for a minimum wage hike ...

[j/k]

Would someone please explain how a minimum wage employee pays a 27.5% tax rate.

social security is 7.5%. At a wage of $15,600 less the standard deduction of $3,800 the taxable income is $11,800.

The tax on a $11,800 income is $1,309 that is 8.4% of the annual wage. Add in 7.5% for SS and you have taxes of 15.9%.

Even if you add in 4% to 6% for state taxes you are still nowhere near a 27.5% tax rate.

Household Income, not individual income. The teenager or working mother working a part-time minimum wage job is increasing the marginal income of the household, so all of their wages would be taxed under the household's highest tax bracket.

Yes, but that is only true for minimum wage workers in families with higher income.

I looked at it a different way.

at a minimum wage of $7.25 a single employee earns $15,080 and pays $2,350 in social security and income taxes.

at a minimum wage of $6.55 they earn $13,624 and pay $2,060 in social security and income taxes.

That is a $1,450 increase in income and a $289 increase in taxes.

So taxes take 20% of the increase.

They still have 80% of the increase.

On a before tax basis they got a 10.7% increase and on an after tax basis they got 10.1% increase.

I think a majority of Americans think that anyone who opposes a higher minimum wage is simply, fundamentally hostile to poor people. They will not listen to any further discussion of the topic.

I think this is a major failing of the economics profession, or a victory for the obscurantists residing therein.

It's ends justifying the means Grubering. There is as much consensus among economists about how basic statements in economics as there is among climate scientists for climate change, and all of those statements lean right in today's politics. The difference is the prevalence of ends justify the means as a fundamental tenet of a world view among leftists than among, for instance, libertarians. That's why, for particular areas of the market, leftist economists concoct magical theories as to why incentives stop mattering, even though they believe incentives matter universally.

Source: The Myth of the Rational Voter, Caplan.

Also, Party of Science: everything evolved, everything is fundamentally a result of natural selection - except for one thing, IQ. I'm a racist just for thinking that IQ might be to some degree genetic. They don't really believe this (well, the useful idiots do), but they'll concoct magical explanations of dog whistles, etc, as to why this science is best left to faith.

In other words, government benefits at the expense of consumers. No kidding.

The practical effect of the minimum wage is to outlaw labor that is not productive enough to be paid minimum wage. That may have some salutary indirect consequences (you might not want to live near people making $1/hr) but job losses probably offset income gains.

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