Even if the minimum wage doesn't hit jobs it hurts the poor


There is a big debate over whether minimum wage increases cause unemployment. A majority of papers say it does, and a bigger majority of the best papers, but there is also lots of evidence that it doesn't always. And we must bear in mind that bodies like the Low Pay Commission are well aware that big hikes are dangerous so they intentionally advise for smaller ones, with the disemployment effect firmly in mind. The debate rages mainly because the minimum wage is such a live political issue. Its proponents see it as an anti-poverty mechanism without the potential stigma of benefits. Its opponents think it risks jobs; better to be employed with a low wage than not employed at all.

But what if that's a false dichotomy. Let's assume it doesn't hurt jobs—let's assume that all of the minimum wage is instead passed along to consumers. Does the benefit from higher wages outweigh the cost from higher prices? A new paper (pdf, up-to-date gated) says 'no':

Low-wage families are typically not low-income families. The increased earnings received by the poorest families is only marginally higher than by the wealthiest. One in four families in the top fifth of the income distribution has a low-wage worker, which is the same share as in the bottom fifth. Virtually as much money goes to the highest-income families as to the lowest.

While advocates compare the wage levels to the poverty threshold for a family to make the case for raising the minimum wage, less than $1 in $5 of the additional earnings goes to families with children that rely on low-wage earnings as their primary source of income. Moreover, as a pretax increase, 22% of the incremental earnings are taxed away as Social Security contributions and state and federal income taxes. The message of these findings is clear: raising wages wastefully targets the poor contrary to conventional wisdom.

Turning to who pays the costs of an increase in the federal minimum wage through higher prices, the analysis reveals that the richest fifth of families do pay a much larger share (three times more) than those in the poorest fifth. This outcome reflects the fact that the wealthier families simply consume much more. 34 However, when viewed as a percentage of expenditures, the picture looks far less appealing. Expressed as a percentage of families’ total nondurable consumption, the extra costs from higher prices are slightly above 0.5% for families at large.

The picture worsen further when one considers costs as a percentage of the types of consumption normally included in the calculation of state sales taxes, which excludes a number of necessities such as food and health care. Here, the implied costs approximately double as a percentage of expenditure. More important, the minimum-wage costs as a share of “taxable” annual expenditures monotonically falls with families’ income. In other words, the costs imposed by the minimum wage are paid in a way that is more regressive than a sales tax.

That is: most of those on the minimum wage are not earners for poor families; the goods produced by minimum wage workers make up a large fraction of poor households' budgets; raising the minimum wage, even if it doesn't cut jobs, hurts the poor more than it helps them.