A Higher Minimum Wage Could Lift Millions Out of Poverty
The federal minimum-wage legislation that Congress is expected to consider later this year (that Obama will surely mention in his State of the Union) would boost the hourly wage floor in America by nearly 40 percent, from $7.25 to $10.10.
By economist Arindrajit Dube's calculation, that increase could lift as many as 4.6 million non-elderly people out of poverty in the United States. As a result, the population living below the federal poverty line would drop by nearly 10 percent. Most compelling: The change would have the greatest impact on the families that struggle the most, those living in "extreme poverty" below half of the poverty line.
This graph, from Dube's latest research, shows that the largest proportionate increases in income from a higher minimum wage would go to the families living in the 10th and 20th percentiles of family income (families already making a median income would see virtually no change at all):
"What that's telling you is you're pulling up the bottom of the family income distribution," Dube says. "And that is reducing inequality. That’s very clear from that graph – you're going to reduce inequality, by almost any measure of inequality. "
The relationship between poverty, the minimum wage, and inequality is complex. But Dube's research (and the work of many other economists) points to a few keys points about how they're intertwined: The declining real value of the minimum wage over the last three decades is at least part of the story of why income inequality has widened. And elected officials struggling with the limited policy levers available to curb inequality might at least consider this one.
Universal, high-quality pre-K, as newly elected New York City Mayor Bill de Blasio has pitched, could narrow inequality in the long run. Raising the minimum wage would have a more immediate impact (although not one that would eliminate the need for pre-K, too).
"If we care not just about wage inequality, but about absolute poverty, then the minimum wage can play an important but modest role in reducing poverty," Dube says. He couches the impact as "modest" because many people living in poverty – such as the elderly – have no connection to the labor market and so wouldn't be helped by policies targeting workers. "I think the first thing to recognize," he says, "is that we need more than one arrow in our quiver to deal with these issues."
Even smaller increases in the minimum wage would have an impact. Raise it by just 10 percent, Dube calculates, and poverty would fall by 2.4 percent (the data he's looked at, however, can't tell us much about what would happen if we hiked it all the way to something like $15 an hour). His research also suggests that the reductions in poverty would be proportionately larger among African-Americans and Latinos than whites, and among workers with no more than a high-school diploma than among the more educated.
All of these numbers aside, Dube suggests that the minimum wage resonates with much of the public as a core question of fairness (thus the broad support for raising it). Perhaps we think it's unfair that someone who works full-time can't get by off their earnings. Or perhaps it seems unfair that wages at the upper end of the income distribution have risen dramatically over the years, without comparable gains at the bottom. If the minimum wage had kept pace over time with inflation and average labor productivity, it would be worth something like $25 an hour now, not $7.25.
"If fairness is a core rationale for a minimum wage, as wages rise overall – especially at the top and the middle – it's natural that most people, when they think of what a fair minimum would be, would ask for a higher wage," Dube says. "To the extent that satisfying such fairness concerns is costly in some way – because it costs jobs – then that’s a tradeoff we have to face and consider."
A separate strand of research, however, suggests that any job losses from a higher minimum wage (its feared "job-killing effect") would be scant or nonexistent.
Top image from a demonstration in Oakland in December: Noah Berger/Reuters