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Raising minimum wage won't lower poverty

By Michael Saltsman, Special to CNN
updated 9:46 AM EDT, Fri September 16, 2011
Cashiers work at a Walmart in Chicago.
Cashiers work at a Walmart in Chicago.
STORY HIGHLIGHTS
  • Michael Saltsman: Study found state minimum wage hikes didn't reduce poverty rate
  • Increase lowers employers' demand for low-income workers, he says
  • Businesses need to grow, invest, he writes, but they can't, if they have higher costs
  • Saltsman: We shouldn't ignore 46.2 million living in poverty but should pursue smarter policies

Editor's note: Michael Saltsman is the research fellow at the Employment Policies Institute in Washington, a nonprofit that studies public policy issues surrounding employment growth.

(CNN) -- The U.S. Census Bureau reported this week that more Americans are living in poverty than ever before measured -- 46.2 million people.

This news was followed by a predictable response from advocacy groups like the National Employment Law Project which suggested that an increase in the minimum wage could help lift Americans out of poverty. And not only that; in a CNN.com op-ed, a policy analyst with the group said that an increase in the minimum wage could boost the economy and create 160,000 jobs.

These claims may pass muster as applause lines at a political rally, but they can't pass the test of rigorous empirical research.

The intuitive thinking on raising the minimum wage is straightforward: Raising the lowest wage that employers can pay will boost the paychecks of the lowest-paid workers and help pull them out of poverty. This line of logic persuaded 28 states to raise their minimum wage above the federal level between 2003 and 2007.

Michael Saltsman
Michael Saltsman

But research published last year in the Southern Economic Journal, a study funded in part by the Employment Policies Institute, found no evidence that these state minimum wage increases reduced poverty rates. The authors, from Cornell and American universities, suggested that some wage gains were flowing to higher-income families rather than the intended beneficiaries.

There's an even more important effect to account for: a decrease in employers' demand for the less-skilled and less-experienced. Those employees who receive a minimum wage increase may be better off, but those who lose their job because they're now more expensive to employ are most certainly worse off.

Research from economists David Neumark, Mark Schweitzer and William Wascher found a higher minimum wage results in a net increase in the proportion of families who are poor or near-poverty -- meaning that the "losers" from a minimum wage increase outnumber the "winners."

That's difficult for advocacy groups like NELP to grapple with, so they generally choose to ignore it. Instead, NELP's executive director dismisses basic economic concepts like supply and demand as "simplistic" and "18th century." In the CNN.com op-ed, the group's policy analyst directed readers to a handful of outlying studies -- in particular, a 1994 study on the minimum wage from economists David Card and Alan Krueger. (The latter was recently nominated to chair the President's Council of Economic Advisers).

Card and Krueger purportedly debunked the decades-long economic consensus that raising the minimum wage reduces employment, claiming that a 1992 minimum wage increase in New Jersey raised employment. To this day, the study is still showered with superlatives like "groundbreaking" by well-wishers at NELP.

But missing from that re-telling is the story's ending: Card and Krueger's headline-grabbing finding -- that raising the minimum wage had increased employment -- was discredited by another study that found serious problems with the quality of their data.

Key questions in the data collection process were so ambiguous that Card and Krueger reported some fast-food locations changing from zero full-time employees to 29 in less than a year; others reported a dramatic drop in part-time employees, from 60 people down to 15.

When actual payroll data was analyzed by economists Neumark and Wascher, the results flipped: far from boosting employment, the mandated wage increase in New Jersey had decreased employment -- just as standard economic theory would predict. That the New Jersey study was an outlier has become even more apparent in the years since: 85 percent of the most credible studies on the subject in the past two decades have pointed to job loss following an increase in the minimum wage.

So, where does that leave NELP and other like-minded advocates?

In recent months, they've tried to get traction on the "consumer spending" argument, which goes something like this: Raising the minimum wage will put more money in the pockets of low-income workers, who will then spend that money, drive the recovery, and create jobs. 

At least the Krueger and Card findings were backed up by a data set, albeit a flawed one. By contrast, this job creation claim is based on no more than a distorted interpretation of a research paper written by three economists at the Federal Reserve Bank of Chicago. It also ignores a recently released Employment Policies Institute study that shows past increases in the minimum wage have provided no boost to Gross Domestic Product -- and even reduced output in certain industries that employ a high percentage of low-wage employees.

This lack of regard for the evidence demonstrates how the "higher costs means more jobs" mantra has become an article of faith for proponents of a higher minimum wage. To bring down the unemployment rate, businesses need to be willing to grow and invest -- neither of which is likely if we're hampering them with new employment costs. That doesn't mean turning a cold shoulder to the 46.2 million Americans living in poverty. It just means pursuing smarter policies (like an expansion of the Earned Income Tax Credit) that are proven to boost incomes and employment without the unintended consequences associated with a minimum wage increase.

After all, working people aren't stuck at the minimum wage -- most earn a raise in their first one to 12 months on the job. But they can't get the raise without experience, and they can't get experience, if they don't have a job.

The opinions expressed in this commentary are solely those of Michael Saltsman.

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