Fighting Poverty with
Mandated Wage Floors
David Neumark
1
Outline
 Mandated wage floors and poverty reduction
 Employment effects
 Effects on low-wage workers: winners / losers
 Effects on poor and low-income families
 The EITC and the minimum wage
 Summary and conclusions
2
Minimum wages and living wages pitched
as tools to fight poverty
 “I intend to do all I can to see that the minimum
wage is increased this year. No one who works
for a living should have to live in poverty.”
(Senator Edward Kennedy)
 Minimum wages will “raise the living standards
of 12 million Americans” (President Bill Clinton)
 “The living wage is a crucial tool in the effort to
end poverty” (Economic Policy Institute)
 “[T]he basic premise of the living wage
movement is simple: that anyone in this country
who works for a living should not have to raise a
family in poverty” (Pollin and Luce)
3
Distributional effects ambiguous: wage
floors create winners and losers
 Gains occur for workers whose wages rise,
who keep their jobs, and whose hours are not
reduced
 Losers include workers whose employment
prospects worsen, or for whom hours
declines more than offset wage increases
 Distributional effects are complicated by
disjunction between low-wage workers and
low-income families
4
Overview of findings from 20+ years of
research
 Minimum wages and living wages cause
employment declines among the less-skilled
 Minimum wages may lead to more poor
families; no evidence establishes that they
reduce poverty
 Living wages have more favorable distributional
effects and may reduce poverty
 EITC is superior policy
– Combining EITC with minimum wage may
have additional distributional benefits
5
Outline
 Mandated wage floors and poverty reduction
 Employment effects
 Effects on low-wage workers: winners / losers
 Effects on poor and low-income families
 The EITC and the minimum wage
 Summary and conclusions
6
Predictions of economic theory
 Economists predict that when something
becomes more expensive, agents use less of
it
– Gas
– Cigarette taxes
 In context of wage floors, “agents” are the
owners of firms, deciding how much labor to
employ
– Just as consumers substitute away from
goods that become more expensive, firms
substitute away from inputs that become
more expensive
7
Important exceptions
 With skilled and unskilled labor, employment
of unskilled will fall, but employment of
skilled may rise
– Overall effect almost surely negative, but
could be small
 If there is uncovered sector, employment may
rise there; and if uncovered sector large,
overall employment may not fall much
– More relevant to living wage than to
minimum wage
8
What does theory predict about
distributional effects of wage floors?
 Evidence of disemployment effects does not
imply that wage floors are bad policy
9
How do we estimate
effects of wage floors on employment? (I)
 Earlier research on which long-standing
consensus on minimum wages was based was
problematic
– Used changes in national minimum wage
– Increases were infrequent
– Increases associated with other changes, like
business cycle
10
How do we estimate
effects of wage floors on employment? (II)
 Minimum wage research begun in 1990s exploits
variation introduced by state minimum wages
– Compared experiences in similar states with
and without minimum wage increases
– Standard method in empirical policy research
– Also applied to research on living wages, at
the city level
11
Overwhelming evidence that minimum
wages reduce employment of least-skilled
 I authored a number of studies beginning in
early 1990s
 Recently reviewed over 100 studies for the U.S.
and elsewhere since then (Neumark and
Wascher, 2007)
– Important exceptions, but 2/3 of studies show
negative effects, and about 85% of the more
reliable studies do
– The more studies focus on the very leastskilled most affected by minimum wages, the
stronger the evidence of disemployment
effects
12
Summary measure of disemployment
effect of minimum wage
 Some remaining dispute, but earlier
consensus largely restored
– Journal of Economic Literature survey:
“best estimate” of minimum wage elasticity
for young workers: − 0.1 to − 0.2
– E.g., elasticity of − 0.2 implies that 10%
increase in minimum reduces employment
by 2%
13
What about living wages?
 Living wages differ from minimum wages in
important ways
 High wage floors
 Narrow coverage
– Contractors and subcontractors
– Business/financial assistance recipients
– City employees
 Because of coverage and wage levels, much
more concentrated on adults than teenagers,
in contrast to minimum wages
14
Largely the same answer with regard to
employment effects
10
Effects on wages and employment rate in
bottom 10th of wage/skill distribution:
100% increase in living wage
Contractor-only
Business assistance
5
% change
0
-5
Wage effects
-10
Adams and
Neumark (2004)
-15
-20
Employment effects
15
Outline
 Mandated wage floors and poverty reduction
 Employment effects
 Effects on low-wage workers: winners / losers
 Effects on poor and low-income families
 The EITC and the minimum wage
 Summary and conclusions
16
Does “moderate” disemployment effect
imply low-wage workers helped?
 “Back-of-the-envelope” calculation
– With elasticity of −0.2, and
10% increase in minimum
• 2% lose their job
• 98% get 10% raise
• Average income of low-wage workers up
by (.98 x 10) – (.02 x 100) = 7.8%
17
But disemployment effect is worse for
those actually affected by wage floor
80% above
minimum
20% at
minimum
Average
Wages
No change
Up 10%
Up 2%
Employment
No change
Down 10%
Down 2%
Earnings
No change
No change
No change
Incorrect calculation
2% employment decline
10% minimum wage increase
Correct calculation
10% employment decline
10% minimum wage increase
18
How do minimum wages affect workers at
or near the minimum?
Estimated response to 10% increase in minimum wage
6
Wages
4
Hours
Employment
2
%
change
Earnings
0
-2
Neumark,
Schweitzer, and
Wascher (2004)
-4
-6
-8
At
minimum
wage
1.1 x
minimum
1.5 - 2 x
minimum
19
Outline
 Mandated wage floors and poverty reduction
 Employment effects
 Effects on low-wage workers: winners / losers
 Effects on poor and low-income families
 The EITC and the minimum wage
 Summary and conclusions
20
What do effects on low-wage workers
imply for low-income families?
 Low-wage workers and low-income families
not synonymous
 Low-wage workers over-represented in poor
and low-income families, but many are in
higher-income families
– No one (Card and Krueger, EPI) disputes
that minimum wages target poor families
badly
21
Many low-wage workers
are in high-income families
Distribution of low-wage workers (< 50% of average wage)
Burkhauser and Sabia (2007)
22
Estimating effects of minimum wages on
income distribution (I)
 Parallels other analyses, but with family as
unit of observation
 Strategy
– Trace out entire income distribution by
state and year
– Compare changes in income distribution in
states raising minimum wage to changes in
other states
23
Estimating effects of minimum wages on
income distribution (II)
Year 1 income distribution (white)
Year 2 income distribution (green)
Minimum
wage increase
%
families
1
Income / Needs
No minimum
wage increase
%
families
Income / Needs
24
Higher minimum wage increases number
of low-income / poor families (estimates)
Effect of average increase in sample period (1986-1995) ≈ 45 cents
Neumark, Schweitzer, and Wascher (2005)
25
Higher minimum wage increases number
of low-income / poor families (estimates)
1
0.8
0.6
0.4
Change
in %
0.2
0
-0.2
-0.4
-0.6
-0.8
0-1
(poor)
1-1.5
(near-poor)
1.5-2
2-3
Income / Needs
Neumark, Schweitzer, and Wascher (2005)
26
How can higher minimum wages
increase poverty?
 Winners: Teens from affluent families?
 Losers: Adult heads of poor, low-income
households? Secondary earners in non-poor, lowincome families (NSW, 2005)
 Related results
– Minimum wages result in redistribution of
income among low-income families (NW, 2002),
and redistribution of jobs among low-wage
workers (NW, various)
• Long-term minimum wage workers
hurt the most (Lang and Kahn, 1998)
 Results consistent with other research (e.g., Wu
et al., 2006)
27
Living wages have more beneficial
distributional effects
Change in likelihood that family falls below income
threshold: 100% increase in living wage
0
-1
Percentage
point change
-2
-3
-4
-5
50% of
poverty line
Poverty
line
150 % of
poverty line
200% of
poverty line
28
Results reveal the “good” and “bad”
aspects of living wages
 Living wages reduce poverty and help
low-income families somewhat above the
poverty line
 Living wages do not increase the “depth”
of poverty
 But results also suggest that these laws
do not help the poorest families
– Not surprising, given lower employment
rates, and that disemployment effects
fall on least-skilled
29
Outline
 Mandated wage floors and poverty reduction
 Employment effects
 Effects on low-wage workers: winners / losers
 Effects on poor and low-income families
 The EITC and the minimum wage
 Summary and conclusions
30
EITC vs. wage floors – theory
 In theory, EITC seems more promising than
wage floors
– Raises income by encouraging work among
less-skilled, especially female heads of
household
– Vs. minimum wage, which taxes hiring of
less-skilled
31
EITC vs. wage floors – evidence
 Unambiguous evidence that EITC increases
labor force attachment and earnings of lowincome families with children (e.g., Eissa and
Liebman, 1996)
 Large share of payments goes to poor families
(Liebman, 1998; Scholz, 1994)
 EITC outperforms minimum wage in terms of
beneficial effects on distribution of family
earnings/income (NW, 2001; Wu et al., 2006;
Burkhauser et al., 1996)
32
Minimum wage-EITC interactions?
 Labor supply response to EITC will reduce
market wage, employment, incomes of lowskilled ineligibles (Leigh, 2007; Rothstein, 2007)
– Can higher minimum wage offset these
adverse effects?
– Unlikely, because raising binding wage floor
will simply strengthen disemployment effects
 More plausible is that EITC may not be enough
to draw single mothers into labor market, but
combining EITC with minimum wage may do so
 Combining two policies can enhance beneficial
effects of EITC on poor families with children,
but worsen outcomes for childless men (and
teenagers)
33
Does a higher minimum wage make the
EITC more effective?
 NW (2009): EITC interacts with the minimum
wage to amplify the labor supply response,
increase in earnings, and reduction in poverty
among single mothers
 But combination of EITC and minimum wage
has adverse effects on the employment and
earnings of less-skilled and minority men,
(especially without children in the home)
 Benefits to single mothers come at a cost, with
minimum wages exacerbating the potentially
adverse effects of the EITC on this group
34
Outline
 Mandated wage floors and poverty reduction
 Employment effects
 Effects on low-wage workers: winners / losers
 Effects on poor and low-income families
 The EITC and the minimum wage
 Summary and conclusions
35
Minimum wage effects unambiguously bad
 Minimum and living wages reduce employment
of less-skilled workers, as theory predicts
 Aggregate disemployment effects moderate, but
low-wage workers, on net, hurt by minimum
wages
 Minimum wages increase poverty
36
Living wages offer more, but limited,
promise
 Living wages have more beneficial
distributional effects, helping poor and lowerincome families, but not the least well off
– Can’t conclude that extending living wage
more broadly would generate similar benefits
– Greater breadth would make them more like
minimum wages, with adverse distributional
effects
– Narrowly-targeted wage floors may
sometimes work, but who should benefit?
37
EITC far more effective, for women with
children
 EITC is better way to fight poverty
– But can harm low-skilled, childless men
 Effects—in both directions—appear to be
enhanced by higher minimum wage
– Extending EITC to low-skilled, childless men
would reduce benefits for poor female
household heads
 Not surprisingly, even the most effective
redistributional policies present tradeoffs, and
some are between different low-income
individuals and families
38