Democrats want to significantly raise the federal minimum wage. Last week, they introduced House and Senate legislation planning staged hikes to $15 an hour by 2024, pegging future changes to median hourly wage growth.
This move will spark a predictable back-and-forth about alleviating poverty. Democrats justify the planned hike by explaining the minimum wage's real value has fallen since 1968, from $11.83 to just $7.25 in today's money.
Critics will counter this comparison ignores government income transfers, and so misleads on the actual change in living standards across generations for minimum-wage earners. Meanwhile, both sides’ focus on incomes will detract from a better focus: how far those incomes go in delivering a decent standard of living.
Consider a debate instigated by presidential candidate Sen. Elizabeth Warren (D-Mass.) recently. She claimed, “When I was a kid, a minimum wage job in America would support a family of three. It would pay a mortgage, keep the utilities on and put food on the table. Today, a minimum-wage job in America will not keep a mama and a baby out of poverty.”
As a narrow factoid, she was correct. Fact-checkers found a single mother with two children and earning the 1961 minimum wage ($9.73 adjusted for inflation) would have hurdled the poverty threshold both then and today. The same worker now would earn $15,080, short of today’s relevant $19,730 poverty threshold.
But since 1961, new welfare programs have proliferated. The earned income tax credit, in particular, supplements incomes for workers with children, but is ignored by official poverty measures. The official 13.5 percent household poverty rate drops to just 3 percent after accounting for these types of transfers.
Shifting away from minimum wage hikes to tax credits as a poverty reduction policy tool was no accident. Policymakers became convinced that in-work top-ups were better targeted and encouraged work, while minimum wage hikes risked rendering low-skilled workers unemployable.
Despite a major academic back-and-forth in the literature, many academic economics still believe that. A study of the federal minimum wage hike from $5.15 to $7.25 in 2009 by economists Jeffrey Clemens and Michael Wither estimated the hike cost 800,000 low-paid jobs.
A report by economists at the University of Washington examining Seattle’s minimum wage hike from $11 to $13 likewise found it reduced working hours and job opportunities for the low-paid. True, other studies find more benign effects.
But an honest assessment would conclude a federal minimum wage hike to $15 an hour is extraordinarily risky. And the effectiveness of minimum wage hikes in reducing poverty is strongly contested anyway, not least because many minimum-wage earners are not from poor households.
Yet the oft-proposed alternative of more redistribution through income transfers, although better targeted, has consequences too. Economists have found transfers have hit diminishing returns in terms of reducing poverty.
Increasing their generosity, meanwhile, generates high effective marginal tax rates given the need for means-testing. At a time when the federal government is already running vast deficits, hiking spending on transfers is unlikely a durable strategy anyway.
Rather than reaching for the same old tools or doubling down on post-1960s orthodoxies, policymakers should instead be asking: Is there a way of achieving better living standards for the poor without requiring expensive government assistance or risky minimum wage hikes?
The answer is yes, but it requires viewing poverty from the other end of the telescope and tackling vested interests on numerous fronts.
Instead of incomes, policymakers should instead focus on living costs, especially prices of essential goods and services. Here there is plenty of low-hanging fruit in terms of reforming existing interventions that drive up prices, hitting low-income households hardest.
Warren was right in alluding to the dignity of being able to use your owned earned income to pay for essentials such as housing, utilities and food. But in all these markets, as well as other sectors such as clothing, transport and child-care, regulations at the state, federal and local level often inflate living costs, to the detriment of the poor.
My research, based on very conservative assumptions, has found that regulations in all these areas combined raise prices for typical poor households by anywhere between $830 and $3,500 per year.
That’s before one considers how high housing, transport and child-care costs restrict job opportunities for the poor by curbing where and whether they can work or travel.
If the Democrats and Warren want to make the biggest difference for the poor, they should abandon the supposedly easy solutions of raising wages by diktat or doling out money and focus instead on the thorny, difficult supply-side reforms in markets for the essentials for a comfortable life.
Doing so might not get the easy headlines of the “Fight for $15.” But it would deliver a double-dividend of lower prices and more opportunities for poor families.