The Case against a $15 Federal Minimum Wage: Q&A

A crude, blanket high minimum wage across the whole country is incredibly risky.

February 25, 2021 • Commentary
This article appeared on Medium on February 25, 2021.

1. President Biden and the Democrats in Congress have proposed gradually increasing the federal minimum wage to $15 per hour by 2025, with the stated intention to raise the pay of low wage workers. Sounds like great news for the low‐​paid, doesn’t it?

An old saying from economist Thomas Sowell is that “there are no solutions, only trade‐​offs.” That is as true about the minimum wage as anything else. The Congressional Budget Office summarizes the mainstream economic consensus on the effects of the Democrats’ proposed aggressive major minimum wage hike fairly well — and I don’t think the trade‐​off is worth it.

Yes, for those workers affected who are lucky enough to maintain their jobs, hours, and existing perks, an enforced minimum wage hike — through raising hourly wage rates — will increase their overall compensation. The CBO estimates that 0.9 million people will be taken out of poverty as a result. But a consequence of raising the mandatory wage floor that aggressively, the CBO predicts, will be that 1.4 million fewer workers will be in employment.

That’s because if you raise the wage rate that companies have to pay by government diktat, businesses will tend to only hire people whose productivity can command that rate, reducing job opportunities or hours available to young, inexperienced, or poorly educated workers.

Now, there’s a debate around the scale of this effect on employment (although the vast majority of the academic literature finds a negative impact of minimum wage hikes). Individual companies will react to the wage slightly differently too, with some able to pass‐​through costs onto their customers or adapt their businesses to find ways to get more output out of their workers.

But even in situations where companies do not cut employment directly in response, a minimum wage hike is not an “unalloyed good.” Unless we suspect that there are a ton of businesses out there currently forgoing free money from getting more productive workers by paying more, then the profit‐​seeking businesses affected will respond by adjusting to the higher wage in some way. This may come in the form of laying off workers, reducing their hours, curbing future hiring, trimming non‐​wage benefits, sweating workers harder, reducing scheduling flexibility, raising prices on customers, or even closing the business entirely.

All these reactions can evidently harm at least some of the low‐​wage workers that a federal minimum wage increase seeks to help. There is, quite simply, no free lunch with minimum wage hikes. What’s more, the first step on this path to a $15 federal minimum wage will occur at the worst possible time: during a global pandemic that has partially or fully shuttered prominent low‐​wage industries.

2. Are you sure all that is right? I thought that I’d read that the newest evidence suggested minimum wages didn’t cost jobs.

Liberal economists, such as Paul Krugman, often claim that “There’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.” But that is not a fair reflection of the academic literature.

In a recent working paper, economists David Neumark and Peter Shirley assembled the entire set of papers that examine the impact of minimum wage hikes on employment outcomes at the subnational level in the U.S. since 1992. Their overview of the results was clear: the overwhelming majority of studies showed a negative effect on employment of minimum wage hikes (79.3 percent of them). That impact was stronger for teens, young adults, and less‐​educated workers.

It’s true that studies which assess the impact of the minimum wage on individual industries, usually restaurants or retail, have been less likely to find negative impacts. But this can reflect employers substituting low‐​skilled workers for higher‐​skilled workers, which still harms the employment prospects of the lowest‐​skilled. Neumark and Shirley summarize their findings by saying: “our evidence indicates that concluding that the body of research evidence fails to find disemployment effects [job or hour cuts] of minimum wages requires discarding or ignoring most of the evidence.”

Indeed, in a Cato Policy Analysis analyzing the overall body of recent research, economist Jeff Clemens concluded that the “new conventional wisdom misreads the totality of recent evidence for the negative effects of minimum wages. Several strands of research arrive regularly at the conclusion that high minimum wages reduce opportunities for disadvantaged individuals.”

He highlights how results on specific historical episodes show a negative effect of minimum wages on jobs. His own research with Michael Wither examining the impact of the federal minimum wage hike during the Great Recession found that states where the minimum wage hike “bound” saw employment among minimum wage workers decline more strongly, costing hundreds of thousands of low‐​wage jobs. In other words, in states where the state minimum wage was not already higher than the new federal level, there was significantly higher job loss from the wage hike.

Yes, a significant minority of studies, particularly those assessing the impact of modest minimum wage hikes in growing economies, find little overall impact on jobs. And it’s true a lot of results hinge on methodological choices, such as timeframes examined and how one defines the counterfactual — that is, what control groups are used to judge the impact of the policy. This and the fact that data is often incomplete, with researchers not having full access to data on worker hours, productivity, and benefits, means it is impossible to fully observe all the margins through which companies might adjust. So it is unsurprising to hear controversies and disagreements.

That’s what made a paper by economist John Horton so interesting. He analyzed an online labor market in which firms contract with workers for tasks including programming, data entry, and graphic design. In contrast with other papers, Horton identified an opportunity to deploy a randomized controlled trial to study the effects of minimum wage increases. As the designer of the study, he could impose differences in firms’ minimum wage requirements through random assignment.

His results were clear: firms make significant shifts in the workers they employ when they are required to pay higher wages. They move away from the least skilled workers and toward workers who demonstrate higher productivity on past jobs. High minimum wage rates thus reduce the employment opportunities of workers who are less productive.

So, yes, there is plenty of evidence that high minimum wage rates reduce employment for groups of low‐​wage workers. Though economists are perhaps less sure on the scale of these impacts on jobs than they were 20 years’ ago, a recent IGM Survey found that 50 percent still agreed with a statement that said “A federal minimum wage of $15 per hour would lower employment for low‐​wage workers in many states,” against just 16 percent who disagreed (34 percent were uncertain).

3. You mentioned that now might be a particularly bad time for raising the federal minimum wage. When low‐​wage workers are suffering through the pandemic, wouldn’t it be the perfect time to try to boost their incomes through raising wage rates?

Workers in industries hard‐​hit by COVID-19 are obviously suffering right now. That is why Congress has passed extensive relief packages, including emergency supplements to unemployment insurance, support to small businesses and specific industries, and sending checks to most households. But the underlying difficulties these industries are facing shows why now might be a particularly risky time for raising the federal minimum wage to $15 per hour, even if the initial jump in 2021 is only to $9.50 per hour.

COVID-19 reduces the demand for workers across sectors requiring in‐​person interaction. Firms require fewer worker hours to staff in‐​person services, because consumers are less willing to attend venues with an elevated risk of catching COVID-19, and because government mandates have forcibly closed or restricted certain venues. On top of this, due to explicit regulation or consumer demands for them, lots of venues such as restaurants are having to impose social distancing requirements too, including table spacing or more regular cleaning. Such requirements make the operations less efficient, reducing the productivity of these industries’ workers.

These factors would be expected to reduce underlying market wages (notwithstanding that the occupational risk of COVID-19 itself may also reduce the supply of workers willing to work in certain sectors). How far above the market wage minimum wage rates are set matters, however, in terms of the scale of the negative effects on jobs or hours. If market wages have fallen, then a minimum wage hike to $9.50 now is likely to result in a greater impact on employment than in a “normal” economy, manifested through greater job losses and fewer hours worked.

This is particularly likely because other ways businesses could potentially adjust to increased hourly wage floors are less relevant right now: businesses in most affected sectors do not have profit margins to eat into, they can’t easily raise prices given consumers are arguably more sensitive to price changes, and the absence of customers makes it difficult to think of obvious ways of making their workers more productive.

Bureau of Labor Statistics analysis from April 2020 confirmed that occupations with lower wages are more common in the worst affected sectors of the economy from COVID-19, including restaurants and bars, travel and transportation, entertainment, and personal services. Three‐​fifths of workers who earn at or below the federal minimum wage, for example — those likely to be directly affected — are employed in the leisure and hospitality industry, almost entirely in restaurants and food services. So, the workers where an aggressive increase in the minimum wage to $15 per hour in the coming years will bite hardest are employed by those businesses suffering most from the pandemic.

There’s another reason why a recovery from a recession may be a particularly bad time to hike the federal minimum wage. As noted, economists Jeffrey Clemens and Michael Wither estimated that states experiencing the largest rise in the wage floor lost several hundred thousand more low‐​wage jobs than they otherwise would have when the minimum wage was hiked after the financial crisis. One reason for this is likely to be “dynamic adjustment.” During economic expansions, fewer firms are dying and the focus is on ramping up production to meet high demand rather than cost‐​cutting. But when we experience a large shock, this often generates an unusually pronounced/​sharp cycle of firm death and birth. Businesses with old production technologies will disappear and be replaced by the new, capital/​technology intensive firms. A minimum wage hike increases the risk of exit for these older firms which are heavily labor dependent, because it is a policy that raises hourly labor costs.

4. A lot of places have increased local and state minimum wages already. What can we learn from their experiences?

Yes, 29 states have higher minimum wage rates than the federal minimum, and a host of (mainly higher productivity) cities and localities have much higher statutory wage floors still. New York City, for example, has a $15 minimum wage, and the minimum wage is $16.69 in Seattle, Washington. Economist Ernie Tedeschi estimated back in 2019 that, as a result of recent aggressive increases and the weight of the population living under different wage floors, the average effective minimum wage across the whole United States was already $11.80 per hour back then.

Studies attempt to exploit this variation between states to isolate the impact of minimum wages on jobs or hours. Evidence on the effects of these increases have been mixed. Those areas that have seen small increases in minimum wages from low levels do not appear to have seen large, direct employment impacts, especially when implemented in a strong economy. But it is important to remember that a $15 federal minimum wage will be extremely high relative to median hourly wage rates in some lower productivity parts of the country. That means the evidence that gives us the best indication on what to expect comes from places that have raised wage floors to very high levels.

In 2014, Seattle city leaders voted to increase its minimum wage to $15 per hour by 2022 in steps. Researchers at the University of Washington have used the state’s unemployment insurance database to assess the impact of the first two rate increases on jobs, hours and earnings, comparing outcomes to what would have happened via tracking a weighted‐​average of other Washington regions with similar employment trends prior to the ordinance.

Their results were striking. The increase from $9.47 to $11 in 2015 resulted in no significant change in labor market outcomes. But the increase to $13 reduced overall hours worked by 6.9 percent. Employers both cut back on the number of low‐​wage employees and the hours they worked relative to the control region.

So big were the measured effects on jobs and hours that, even though the minimum wage hike raised wage rates significantly, low‐​wage workers as a cohort were worse offSubsequent work by the Seattle team found evidence that employment fell only a little, if at all, for workers with prior experience in low‐​wage jobs, however. This suggests that employment declined primarily because of reductions in hiring rather than increases in firing — a finding that echoes economists Jonathan Meer and Jeremy West’s work on the longer‐​term consequences of minimum wage increases.

The original Seattle study also showed why other types of research may underestimate the impact of minimum wage hikes on jobs. A rival paper found no negative effects of the minimum wage hikes in Seattle when examining food service employment, for example. The University of Washington study replicated this finding by examining restaurant employment alone. But they found large negative effects on employment when focusing exclusively on low‐​wage restaurant employment (those earning less than $19 per hour). This suggests Seattle’s minimum wage increase shifted employment from lower‐​wage to higher‐​wage restaurant workers. The results for restaurants in both studies suggest that examining the restaurant sector alone as a guide to impact of minimum wages, as many studies do, can hide bigger economy‐​wide negative impacts on employment levels across all sectors.

In interpreting all this evidence to think about the Democrats’ proposal, we have to bear two things in mind. First, economists believe the level of the minimum wage still matters, and that the larger the “bite” of minimum wage (its level against median earnings), the more deleterious the impact on employment prospects is likely to be. Second, that notwithstanding, a very high minimum wage can still have big relative consequences on lower productivity workers within a state, even if the aggregate impact in some places appears small.

To put it another way: a $15 federal minimum wage would likely have a much bigger impact on Mississippi, where a $15 wage rate is currently around 100 percent of median hourly wages, than New York, where it is 66.8 percent. Even within Mississippi, it’s likely to have bigger impacts on job prospects in certain industries.

A crude, blanket high minimum wage across the whole country is therefore incredibly risky. As economist Tyler Cowen has written, even if you think the trade‐​offs of having a relatively high wage floor are worth it, economics would suggest setting them at the local level, given this huge divergence in productivity levels across the country.

5. OK, but a lot of economists seem convinced that minimum wage hikes will not have the sorts of negative effects you outline, even with a $15 federal minimum wage. How do they explain this?

There are two broad reasons why some economists support aggressive federal minimum wage hikes. The first is a standard “market failure” argument — the idea that lots of low wage labor markets are characterized by businesses having power over workers that can depress wages, which a skillfully set minimum wage can help correct. In this view, minimum wage hikes might enhance economic efficiency. The second is that minimum wage hikes represent a good distributional social policy. That is, they have desirable social consequences, such as in reducing poverty, that outweigh any impact on employment or worker’s experiences that worsen inefficiency.

Let’s take the efficiency‐​monopsony argument here, because this is extremely fashionable. Proponents of minimum wage hikes highlight that some minimum wage studies show few job losses from minimum wage hikes and therefore need a theory to explain this result. One theoretical explanation is that many low‐​wage labor markets are characterized by a degree of monopsony power — a situation where one employer has significant market power to determine wages for the sector. In this scenario, we might not see significant job losses even if a higher minimum wage rate is implemented.

In a monopsony model, employers have the power to set overall hourly compensation rates below market rates and they tend to employ fewer people than they would in a competitive labor market as a result. That’s because the businesses’ labor market power enables it to pay lower wages when it hires fewer workers, such that the benefit from lower labor costs outweighs the cost of foregone output and rev​enues​.In theory then, if such a market exists, a minimum wage that is carefully set so that the wage rate is closer to what we would see in a competitive market can bring the double‐​dividend of higher hourly wages and more employment.

But is such a theory a credible justification for believing a $15 federal minimum wage wouldn’t have significant negative consequences for the U.S.? It seems unlikely.

First, low‐​wage occupations are often in highly competitive product markets. Previous Bureau of Labor Statistics research has identified “food service; housekeeping; low‐​level healthcare positions, such as nursing assistants; and low‐​level retail positions, such as cashiers” as the most prominent low‐​wage industries. Few would argue businesses in these industries have enduring market power in the markets for their products or services. Yet if they do not, then any monopsony power they have in labor markets would be competed away through lower output prices, meaning the monopsonist would not be making significant profits from this labor market power. A minimum wage hike in this scenario would therefore risk causing some businesses to become unprofitable even with monopsony power, causing offsetting job losses through business failures.

Second, very few studies find that minimum wage hikes increase employment, which is what we should expect to see if a monopsonists’ wage rate was being corrected by skillfully set minimum wage policies. David Neumark and Peter Shirley’s literature review on the state‐​level impacts of U.S. minimum wage hikes has found that just 5.8 percent of studies actually found positive effects of minimum wage hikes on employment. Indeed, academic economists don’t seem to buy the widespread monopsony argument: they overwhelmingly reject the idea that a $15 minimum wage would increase economic output significantly.

Third, all this suggests that, rather than being a free lunch, companies adjust to the minimum wage hike in other ways. The monopsony model, remember, says that companies have the power to keep overall compensation rates below competitive levels. But the minimum wage only affects hourly wage rates. Firms might adjust employee benefits or other aspects of the workers’ overall compensation package to compensate for the higher wage rate. In a review of recent research for the Journal of Economic Perspectives, Jeffrey Clemens discusses a substantial body of evidence on this and other margins along which firms can adjust (more on that later). In markets with monopsony power that are in non‐​competitive markets, theory predicts that businesses will tend to pass on the higher compensation costs to customers in the form of higher prices. This is indeed what Peter Harasztosi and Attila Lindner found when they examined the impact of a large increase in the minimum wage in Hungary.

Finally, and perhaps most importantly, even if monopsony power did exist in certain markets, it would differ in degree by location and industry. The level at which the minimum wage was set would therefore matter a great deal, lending itself to favoring policy at the very local level. It would be incredibly convenient if a $15 federal minimum wage could perfectly correct for the monopsony power of businesses in all sectors and locations. A crude application of a $15 minimum wage across all states and regions would instead likely raise the level of the minimum wage beyond the level associated with competitive markets in many areas and industries. Again, this would lead to the usual reduction in worker demand in lots of places.

6. Wow, that all seems very theoretical. If monopsony can’t explain why some companies do not reduce hours or jobs in the face of a minimum wage hike, then what does?

Well, in reality, every company affected by a minimum wage hike will react to it differently depending on their specific situation. But in the absence of some costless productivity free lunch, businesses will have to find some other “channel of adjustment” if they don’t cut jobs or hours, many of which might still be damaging for workers.

What might these entail? One possibility, as mentioned, is that some companies will pass some or all of the cost of the higher wage onto consumers in the form of higher prices. Previous research from Jonathan Wadsworth in the UK has found that prices of “take‐​away foods, canteen meals, hotel services and domestic services” increased significantly more quickly in the four years after the country’s minimum wage increase than prices in non‐​minimum wage sectors. A recent study by two Princeton economists examining how McDonald’s reacted to minimum wage hikes found evidence “consistent with near‐​full price pass through of minimum wages in McDonald’s restaurants.” This chimes with research by Sylvia Allegretto and Michael Reich on a wage hike in San Jose, California, which estimated that almost all of the cost of a minimum wage hike there was passed on by restaurants to consumers.

Not every business or industry will react this way, of course. University of Washington research into the impact of the Seattle minimum wage hikes found no such uplift in food prices from supermarkets and that child‐​care centers adjusted both demand for labor and fees. But when assessing the net impact of a minimum wage increase, one must also consider that consumers might face higher prices, and that poorer consumers will be impacted by price increases disproportionately in some sectors. Jacking up the price of takeaway food, hospitality services, and others clearly means that a minimum wage increase is not an unalloyed good for low‐​income households.

We know that poorer households, for example, spend a far larger proportion of their budgets on food. And we also know that many of those who do benefit from the federal minimum wage hike will not be poor: those earning the federal minimum wage are much more likely to be under‐​25 and part‐​time workers than the rest of the working labor force, for example. So, considering who bears the higher prices and who benefits from the wage increase, minimum wage hikes are likely to be less progressive than we might expect.

Some companies may decide, of course, that, at least in the very short‐​term, it is best to try to tough it out by bearing the higher labor costs on their bottom line. But that’s not economically costless at the societal level either. Weaker profits will increase the likelihood of firm deaths, risking jobs if companies die. A study of Yelp data, for example, found that minimum wage increases in San Francisco predict increases in exit among restaurants that are lower rated. What’s more, lower profit rates in certain sectors will discourage business start‐​ups and entry into them, reducing future job opportunities, or else consumer welfare. Again, there is no free lunch.

Given businesses are not charities, it is more likely that businesses will adjust in other ways, such that the pay uplift for workers is offset by other changes to their compensation or work conditions. Non‐​wage aspects of jobs, as Clemens outlines, such as the convenience of schedules, security of work hours, health insurance quality, retirement benefits, payments‐​in‐​kind, and workplace conditions, are important determinants of how much workers value jobs. There are theoretically a whole host of margins that businesses could toy with to recoup some of the increased labor costs.

The economic literature on these adjustments is less advanced. But some initial studies highlight its potential importance. Analyses of more recent minimum wage changes tend to find negative effects of minimum wage hikes in terms of the generosity of employer‐​funded health insurance, for example. Evidence from the UK suggests successive minimum wage hikes have seen companies in labor‐​intensive industries putting affected workers onto contracts that do not guarantee hours so that companies can better control their labor costs. There have been examples around the world of fast‐​food outlets stripping staff of free food benefits after major minimum wage hikes too, one of a number of other ways businesses might change non‐​cash compensation.

Now, quite often minimum wage proponents respond to these potential trade‐​offs by claiming that firms can adjust to minimum wage hikes by “raising productivity.” But unless the change in the law suddenly made companies realize that they were leaving free money lying around beforehand, then “raising productivity” is not costless.

Boosting productivity might require replacing inexperienced low‐​skilled employees with more experienced, higher productivity employees, or else making longer‐​term investments in labor‐​saving machines. This comes with search, turnover and investment costs in the short‐​term and reduces opportunities for low‐​skilled workers in the longer‐​term.

We know this can have a scarring effect on young workers, who lose entry‐​level job opportunities that provide basic skills and habits, including punctuality, and dealing with customers and colleagues. David Neumark and Olena Nizalova found that, even in their late 20s, workers who had been exposed to high minimum wages when they were younger worked less and earned less. This effect was especially strong for black Americans.

“Improving productivity” might instead entail putting pressure on workers to produce more during their contracted hours. This impact was noted as early as 1915, when workers’ experience following a minimum wage increase was described as “…constant pressure from their supervisors to work harder; they are told the sales of their departments must increase to make up for the extra amount the firm must pay in wages.”

More recently, a Financial Times article on the impact of the rising minimum wage in the UK found that fruit picking had intensified a lot since the minimum was introduced there. It said “the harvest [used to be] brought in by students, Welsh miners after the strike and ‘local ladies from Ledbury’ who wanted summer cash…‘the slow ones could just be slow and nobody minded.’” Now, there’s training and pressure, with people being told “’…through the day, you’ve got to get faster, you’ve got to hit the target of however many units it is….it’s a mental and physical discipline.’”

This is important. Minimum wage proponents often talk about the promise of high productivity as if it is a win‐​win for workers and businesses. By raising the minimum wage rate, it is claimed, firms will benefit from reduced staff turnover, with happier and more productive employees. But if this were a net benefit to the firm, wouldn’t they be raising wage rates already?

That some firms do raise wage rates voluntarily, and observe benefits, does not mean you can generalize that effect to the whole economy. Nor, indeed, is it clear why it is assumed that reducing turnover at an economy‐​wide level would be good for overall productivity. The higher wage for low‐​skilled workers might reduce the incentive, on the margin, to leave the company, seek promotion, or invest in human capital, especially if one consequence is a reduction in the gap between low‐​wage earners and those higher up the income scale. This could actually reduce economy‐​wide measured productivity over time.

Recently, people have added a new argument: talking up the minimum wage as a macroeconomic tool. $15 minimum wage proponents sometimes claim that low‐​paid workers’ higher propensity to spend additional earnings means minimum wage hikes boost demand and raise the level of GDP, boosting economic output through a consumption effect. But this ignores contractionary impacts from lower profits reducing investment, higher prices reducing other spending or reduced employment opportunities cutting some people’s incomes. Standard economic theories suggest that, overall, tightening the impact of a price floor like this is likely to reduce overall output. An overwhelming majority of economists (69% to 4%) disagree with the idea that a $15 minimum wage would substantially boost output.

7. OK, you’ve mentioned the importance of the link between productivity and the wage rate a few times. But didn’t I read that while productivity has continued rising over the past five decades, the minimum wage has failed to keep up? Isn’t there a case for increasing the minimum wage to make up for this lost ground?

Economy‐​wide labor productivity has undoubtedly risen faster than federal minimum wage rates over the last fifty years. But it’s a huge leap to suggest this shows employers are somehow exploiting workers and paying them below what their productivity commands.

The mistake here is to consider productivity gains among all workers as if these reflect what should have happened to hourly wage rates for minimum wage workers alone. After all, different industries experience different productivity growth rates over time.

Sadly, a productivity growth series solely for minimum wage workers is not available. But just look at the long‐​term data for the food services industry. The Bureau of Labor Statistics data series from 1987 to 2017 shows that labor productivity in the food service sector rose by an average of just 0.4 percent per year (with unit labor costs increasing by 3.2 percent per year) over those three decades.

If the minimum wage had been pegged to this productivity measure, it would have increased by 13 percent in real terms — from $7.16 in 1987 (2017 dollars) to $8.06 in 2017. The actual 2017 federal minimum was, of course, $7.25 in 2017 and state minimums in much of the country were much higher than $8.06. Using this productivity series and start date then, many state minimum wages, and almost certainly a $15 federal minimum wage by 2025, would be far higher than justified by food service productivity improvements since 1987.

This does not prove, of course, that all workers are paid at their productivity levels, nor does it tell us what the “right” level of the minimum wage should be in each market. But it does show the danger of making spurious comparisons between economy‐​wide productivity and minimum wage rates. Pegging minimum wage rates to aggregate productivity trends might lead us to deliver much higher wage floors than justified by the productivity of workers in certain sectors, causing significant job losses or the other downsides to workers that we’ve already outlined.

8. So let’s say you are right that the $15 federal minimum wage is not great economics in terms of efficiency. You said a lot of economists favor minimum wage hikes on the grounds of social policy. No firm should pay wages that leave people in poverty, should they?

Well, President Biden’s goal that nobody working full time should live in poverty is a laudable ambition. But even though, as the CBO suggests, we’d probably expect a big minimum wage hike to reduce poverty somewhat, it’s a more of a blunt instrument than you’d imagine.

First of all, one consequence of federal minimum wage hikes can be job or hours loss for low‐​wage workers, as we’ve seen, which can create poverty. Second, a lot of people who earn the federal minimum wage or just above it are not poor, or will not be poor in the longer term (think of working students, or second‐​earners in relatively affluent households working part‐​time).

Meanwhile a lot of the price increases resulting from pass‐​through of the minimum wage costs will be on products that the poor buy disproportionately or which might affect them most harshly — imagine what a big rise in child‐​care costs would have on poorer parents’ labor market opportunities, for example.

A full picture on the distributional aspects of the minimum wage would need to take this all into account rather than just looking at the impact on earnings for those who maintain their jobs or hours. This is a classic case of there being a clear “seen” (the minimum wage increase) that we’d expect might reduce poverty, but with a significant “unseen” (the adjustments to hours, worker benefits, price, and more) that could increase poverty.

As has been alluded to already, who bears the cost of an increase in the federal minimum wage will be affected by a vast range of business and region‐​specific factors. But, in principle, putting the full costs of meeting any societal anti‐​poverty ambition onto the shoulders of some combination of the employers of the low‐​wage workers, those who consume their products, or other low‐​paid workers seems misguided. Especially because there are other anti‐​poverty policies — not least undoing the damage of regressive government regulations — that could reduce poverty without some of these negative effects.

To circle back to Biden’s anti‐​poverty mantra, a lot of Democrats talk about the federal minimum wage as if policymakers or employers have a duty to set a wage floor such that each and every worker, often in very different circumstances, can live comfortably. But companies pay workers for the job they do, not some arbitrary figure based on how many children someone has, their housing costs, food bills, and more.

Every family’s situation is different and what matters in covering their living expenses are households’ overall incomes, not just hourly pay rates. A government that was serious about an anti‐​poverty agenda then would focus on improving productivity growth to raise wages, eliminate regulations that inflate the cost‐​of‐​living, and then have government support families who really fall through the gaps, but explicitly raising the funds through taxation and then targeting those in need.

About the Author
Ryan Bourne

R. Evan Scharf Chair for the Public Understanding of Economics