It's a reasonably common argument in favour of the minimum wage that it aids in reducing poverty. The logic seems simple: if people are poor because they don't have enough money and they get more money because of the minimum wage then they will be less poor. And that logic is clearly and obviously true too. But do note the important core of that argument and logic, which is "and they get more money because of the minimum wage". If that is not true then the argument fails: fails as a justification for the minimum wage at least. We also need to recognise an important economic point here, which is that money isn't actually the point at all. The ability to consume is. So the correct thing for us to be looking at is not the nominal amount of money that someone gets but that nominal amount times the price they have to pay for things: their real wages that is, not their nominal ones.
The absolutely standard analysis of a change in the minimum wage is that if lowly paid workers get more money then that money has to come from somewhere (well, D'oh!). There are only three places it can come from, the wages of other people (CEOs and executives get paid less perhaps, some people get fired), profits (the capitalist plutocrats get less) or consumers (prices rise to pay for the higher wages). Who actually gets more cash money from a rise in the minimum wage will depend upon who is actually earning minimum wage. Is it actually poor people who do earn it? Or are there some people in better off households earning it as well? And that, interacting with whatever blend of where the cash comes from (other wages, profits or prices) will determine whether raising the minimum wage actually makes the poor better off. Which is, recall, the argument often proffered, that we should raise the minimum wage to make the poor better off, make them less poor.
Yes, since you ask, I am in favour of making the poor better off. I think we all should be as well. My only insistence is that whatever it is that we actually do about this should actually work in achieving this goal. Which, it seems, it doesn't.
Via Tyler Cowen we get this:
The efficacy of minimum wage policies as an antipoverty initiative depends on which families benefit from the increased earnings attributable to minimum wages and which families pay for these higher earnings. Proponents of these policies contend that employment impacts experienced by low-wage workers are negligible and, therefore, these workers do not pay. Instead proponents typically suggest that consumers pay for the higher labor costs through imperceptible increases in the prices of goods and services produced by low-wage labor. Adopting this “best-case” scenario from minimum-wage advocates, this study projects the consequences of the increase in the national minimum wage instituted in 1996 on the redistribution of resources among rich and poor families. Under this scenario, the minimum wage increase acts like a sales tax in its effect on consumer prices, a tax that is even more regressive than a typical state sales tax. With the proceeds of this national sales tax collected to fund benefits, the 1996 increase in the minimum wage distributed these bulk of these benefits to one in four families nearly evenly across the income distribution. Far more poor families suffered reductions in resources than those who gained. As many rich families gained as poor families. These income transfer properties of the minimum wage document its considerable inefficiency as an antipoverty policy.
Do please note that this is an academic paper and so that "considerable inefficiency" should really be read as "this is a lunatic thing to be doing so let's stop, OK?" It's also worth noting that this paper uses a particularly devilish trick. It actually assumes (and states that it assumes) all of the arguments favourable to the minimum wage. That there are no job losses, that higher prices do not lead to lower consumption (for of course that would imply job losses again) and so on. Everything works out as the proponents of higher minimum wages contend: and yet the minimum wage still doesn't reduce poverty. Because "far more poor families suffered reductions in resources than those who gained".
Yes, that is: "the minimum wage increases poverty, not reduces it."
I really do recommend a thorough reading of this paper.
The mechanism by which it all goes wrong is rather simple. A good portion of the higher nominal wages of a rise in the minimum wage go to people who are not poor. But the effects of the higher prices which pay for the higher minimum wage are felt by those who are poor. Thus the real incomes of the poor fall with a higher minimum wage. That is, a higher minimum wage increases poverty, not reduces it.
At which point we should probably go off and do something else really. And this paper also tells us what that other thing is. For, if the problem is that a raised minimum wage takes from the poor and at least partially gives benefits to the not-poor, then we might want to devise some other system where we take money from the not-poor and give it to the poor. Because the poor having more money, as we've already observed, does make them less poor (as long as it is more in real terms, not nominal). Fortunately, we already know how to do this, it's called the tax and benefit system. Thus, if we are social warriors determined to reduce poverty then we should be advocating higher taxes on the not-poor and giving the money to the poor. Which is what I do advocate to such social warriors (while not actually advocating the policy itself simply because I'm a cruel plutocrat who doesn't worry much about poverty. Or as is actually the truth, I'm someone who doesn't consider the current US definition of the poverty line plus benefits as actually constituting poverty in any real sense, there therefore being no US poverty that needs alleviation).
This is, of course, a less than appealing public policy proposal which is why so few people use it. It's unappealing because the people who would have to pay the higher taxes, a rather larger group than the people who would benefit, won't vote for it. Which is why we get all of these contortions about the minimum wage because no one seems to realise that it's the poor paying for it by becoming poorer.
By the way, if the minimum wage doesn't reduce poverty, as it doesn't, then it also doesn't decrease inequality. Which means that there's really very little going for it, doesn't it?
