Minimum Wages Redistribute Income Among Low Income Families

Summary of working paper 6127
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...minimum wages help to raise the level of income above the poverty line in some families, but push income below the poverty line in others.

After intense debate, Congress decided in the summer of 1996 to increase the federal minimum wage by 90 cents in two phases, from $4.25 to $4.75 on October 1, and to $5.15 on September 1, 1997. Although the debate over the minimum wage focused on its effect on employment of young and less-skilled workers, the primary goal of the minimum wage hike was to raise the incomes of poor or near-poor working families. But in Do Minimum Wages Fight Poverty? (NBER Working Paper No. 6127), NBER Research Associate David Neumark and William Wascher suggest that the hike may not work.

Looking at increases in the minimum wage between 1986 and 1995, Neumark and Wascher find that over a one-to-two-year period, minimum wages help to raise the level of income above the poverty line in some families, but push income below the poverty line in others. The poor families that benefit from an increase in the minimum wage do so because the higher minimum tends to raise earnings per worker in families with working members both before and after the increase.

On the other hand, during this same time period, the "disemployment effects" of minimum wages tend to lower the average number of workers per family, either because a working member loses a job or because a family member who would have been employed in the absence of the minimum wage increase is unable to find a job. This disemployment effect is concentrated among families that were previously only a little above the poverty line. Thus the decline in employment -- which can lead to a relatively large change in income -- results in some families falling into poverty. Neumark and Wascher estimate that the net effect of a minimum wage increase is a one-half-to-one-percentage-point increase in the proportion of families that are poor.

"Because not only the wage gains but also the disemployment effects of minimum wage increases are concentrated among low-income families, the various tradeoffs created by minimum wage increases more closely resemble income redistribution among low-income families than income redistribution from high- to low-income families," the authors write. "Given these findings, it is difficult to make a distributional or equity argument for minimum wages."

To estimate the effects of minimum wages on poor and near-poor families, Neumark and Wascher use annual Current Population Surveys (CPS) conducted by the Bureau of the Census from 1986 through 1995, and information on changes made by individual states in state minimum wages. Matching the CPS files provides two years of data on families, allowing the authors to trace families' transitions into and out of poverty, or between other parts of the income distribution.

Using the matched CPS data, the authors find "no compelling evidence" that minimum wages help in the fight against poverty. A higher minimum wage, they write, generates tradeoffs with respect to the incomes of poor and low-income families. Some families gain and others lose.

According to the authors, previous research tells us very little about the effects of minimum wages on family incomes. In particular, knowing the likely employment effects of minimum wages on individual workers is not very helpful in assessing the impact of the minimum wage on the incomes of poor families. For example, a hike in the minimum wage for one family member may induce another member of the family to work less, or may lead to a change in family living arrangements. Alternatively, some workers disemployed because of a minimum wage increase may become eligible for government benefits, such as welfare, which could ease the negative effects on total family income. Finally, many minimum-wage workers are not in low-income families. The impact of minimum wage increases on poor families will be influenced by the level of family income of those minimum-wage workers who get the largest raises and, perhaps more importantly, by the family income of those who become disemployed.