Oh crap: new study shows what higher minimum wages do to poverty

Why should we raise the minimum wage? The most common argument is to reduce poverty.

Bernie Sanders tells us that “no one who works full time should have to live in poverty.” Economics isn’t a morality play regardless – but here are two surprising statistics that blow Sanders’ statement out of the water. The poverty rate among full time workers is only 2.7 percent – and 36 percent of the poor earn over $12 an hour – so maybe poverty has to do with something more than just wages.

As most of you already know, a disproportionate amount of youth earn the minimum wage. As such, even if they earn low wages the vast majority live in households that are above the poverty line.

So if full time workers aren’t impoverished, many of the poor are earning higher wages than we expected, and most minimum wage workers are teenagers, would raising the minimum wage reduce poverty? It doesn’t seem so, and a new study is out to prove it.

To quote from Townhall:

It appears as though the #FightFor15 may have been a tad misguided. New research from the San Francisco Fed shows that simply raising wages does not do much to help lift people out of poverty, and that increasing the earned income tax credit is likely a better way to help people.

The reasoning behind this is that many families living in poverty don’t actually work, meaning that increasing their (nonexistent) wage doesn’t help their situation.

David Neumark, the author of the study, said that raising wages does not help poor families living below the poverty line, and suggested adjusting tax credits.

“Mandating higher wages for low-wage workers does not necessarily do a good job of delivering benefits to poor families,” Neumark wrote. “Simple calculations suggest that a sizable share of the benefits from raising the minimum wage would not go to poor families.”

Increasing the earned income tax credit is a more effective way to fight poverty, he said. A family of four can get a credit of up to $5,548, which Neumark said is more tailored toward low-income families than hikes in the minimum wage.

“The earned income tax credit targets low-income families much better, increases employment and reduces poverty, and for all these reasons seems far more effective,” he wrote. “Policymakers are likely to do a better job fighting poverty by making the EITC more generous than by raising the minimum wage. Furthermore, using both of these policies together is more effective than minimum wage increases in isolation.”

Republicans were right on the issue before we had a study to vindicate it. Gerald Ford created the earned income tax credit credit, and Ronald Reagan expanded it. This election Marco Rubio released plans to improve the credit by having workers receive the credit monthly instead of in a lump sum annually.

Liberals can claim all they want that Republicans don’t help the poor – at least there’s evidence our solutions work.

[Note: This was authored by The Analytical Economist]

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