The US minimum wage conundrum: More working poor, or fewer poor workers?

February 18, 2014
February 18, 2014

A new analysis from independent government bean counters has American politicians up in arms over proposals to hike the US minimum wage from $7.25 an hour to either $9 or $10.10.

Here’s the most interesting chart, because it captures a bunch of competing dynamics: The effect on the family income of people relative to the US poverty threshold (currently, $23,550 for a family of four). As you can see, if the minimum wage is raised, the largest increase in real income will go to the poor, and the largest decrease, to people earning six times the poverty threshold or more:

Screen Shot 2014-02-18 at 3.06.29 PM

The Congressional Budget Office, the non-partisan agency that conducted the analysis, would have you note a few competing points that underlie these numbers. One is that, while an increase to $10.10 an hour would benefit 16.5 million low-wage workers, it forecasts some 500,000 jobs would be eliminated due to cost-cutting—but the ultimate effect is still a $5 billion increase in total income for people below the poverty line, pulling some 900,000 of them over the threshold. At the same time, a higher minimum wage would mean lower profits for business owners and higher prices for consumers, leaving wealthier Americans ever so slightly worse off: the average family of four making more than $150,000 a year would see its income reduced some $700.

None of this will surprise anyone familiar with the economic literature on minimum wages, which tends to find that they both fight poverty and reduce the number of low-wage jobs.

The usual arguments in favor and against—some advocates say that a minimum-wage increase is a costless way to help the poor, while some detractors argue that it will result in mass lay-offs and price hikes—both get short shrift from this analysis. What’s left are decisions about how policymakers should best deal with labor problems: by structuring markets that create more low-quality jobs for the working poor, or by raising wages so that fewer people who work are poor.

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