Minimum Wage

$15 Minimum Wage Follies in California and New York

Good intentions, but a near total failure as an anti-poverty policy

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$15MinimumWage
University of Dallas

Both California and New York have just adopted measures to raise their minimum wages to $15 an hour over the next few years. Los Angeles Mayor Eric Garcetti hailed the increase, declaring, "Today California leads the nation once again, passing a historic minimum wage increase that will help lift millions of hardworking men and women out of poverty." New York Gov. Andrew Cuomo was pleased too: Not long before signing the legislation, he had been saying, "If you work full time, you shouldn't have to live in poverty—which is why it's time for New York to lead the way and pass a $15 minimum wage." Like many supporters of the increases, both politicians evidently believe that it is an effective anti-poverty policy.

On the face of it, it seems like a no-brainer: Boost a worker's income enough, the thinking goes, and you'll push him or her over the poverty line. Working full-time for the current federal minimum of $7.75 per hour, a single mother would earn only about $14,500 per year. That is well under the $19,000-a-year poverty line for a family with a single working adult and two children. Boost her pay to $15, and she'll be well over it. 

But does this really lift poor people out of poverty? The economic literature strongly suggests not. 

In a normal supply and demand situation, increasing something's price generally lowers the demand for it. So raising the price of labor should reduce the demand for workers. In December 2015, the University of California, Irvine economist David Neumark undertook a comprehensive review of minimum wage studies for the San Francisco Federal Reserve Bank. He concluded that "current minimum wages have directly reduced the number of jobs nationally by about 100,000 to 200,000" from what they would otherwise have been.

In an even more recent analysis for the Federal Reserve, Neumark asked how effective raising the minimum wage is at reducing poverty among those low-wage workers who remain employed. He found that if wages were simply raised to $10.10 per hour, as favored by President Barack Obama, with no changes to the number of jobs or hours, only 18 percent of the total increase in incomes would go to workers in families living in poverty. Thirty-two percent of the benefits would flow to families living in the top half of the income distribution.

How can that be? Neumark points out that the relationship between being a low-wage worker and being in a low-income family is fairly weak. First, in 57 percent of poor families, no one has a job, so no one gets any wages at all. Second, other workers have low incomes because they work low hours, not because they have low wages. Neumark notes that 46 percent of poor part-time workers have hourly wages above $10.10 and 36 percent above $12 per hour. Finally, many low-wage workers are secondary workers who live in well-off families—teens, for example.

Neumark reports that most economic research finds "no statistically significant relationship between raising the minimum wage and reducing poverty." This assessment is bolstered by a November 2015 study conducted by the Georgia Institute of Technology economist Carlos Ramirez and his colleagues. An increase in the minimum wage, they concluded, "would only lead to increased unemployment and no change in the poverty rate." In addition, preliminary estimates by the San Diego State University economist Joseph Sabia and his colleagues suggest that higher minimum wages do not even reduce government spending on welfare and other programs to support poor families.

By signing legislation that raises the minimum wages to $15 an hour, the governors of California and New York have engaged in a kind of feel-good but fact-free political theater that will most likely harm the job prospects of their poorest residents and will do almost nothing to alleviate poverty in their states.