Wednesday, 12 February 2025

Higher minimum wages and poverty revisited

One of the key purposes of a minimum wage is to decrease poverty. However, there is no certainty that poverty would be reduced by a higher minimum wage. In the simplest sense, we can think about several effects of higher minimum wages on poverty. Income goes up for those earning the minimum wage, and therefore poverty may decrease. However, if there is any disemployment (workers losing their jobs) resulting from the minimum wage, poverty may increase. Poverty may also increase if there is significant pass-through of higher minimum wages into prices (as noted in this post), increasing the cost of living for all households. So, whether higher minimum wages increase or decrease poverty, or don't affect poverty at all, is essentially an empirical question (and one that I have written about before).

Until relatively recently though, there was some general consensus among economists that the minimum wage is ineffective at reducing poverty. Aside from the offsetting effects I noted above, the minimum wage isn't really well targeted at the poor (consider, for example, the number of teens from relatively high-income families who work in jobs paying the minimum wage).

So, the lack of an effect of minimum wages on poverty was generally agreed on by economists. Until this 2019 article by Arindrajit Dube, published in the American Economic Journal: Applied Economics (open access), which claimed to show that there was a large effect of higher minimum wages on poverty in the US between 1983 and 2012. That Dube article got a lot of press at the time, and encouraged support for a much higher federal minimum wage, as encapsulated in the US Raise the Wage Act of 2021 (which died in Committee).

Dube's article also shook the consensus among economists, and thus it also attracted attention from other researchers. And unsurprisingly, some have looked closely at the analyses. This 2023 NBER Working Paper by Richard Burkhauser (Cornell University), Drew McNichols (Amazon), and Joseph Sabia (San Diego State University) is one such effort. As they explain:

This study revisits the relationship between minimum wage increases and poverty. We highlight four key results. First, we replicate and reassess the findings of Dube (2019), based on poverty data from the March 1984 to March 2013 CPS (corresponding to calendar years 1983-2012). After precisely replicating his estimates, we show that his results are driven by two specification choices: (1) the inclusion of macroeconomic controls (the state unemployment rate and per capita state Gross Domestic Product) that may also capture a mechanism through which the minimum wage affects poverty: its employment and hours effects, and (2) restricting treatment states’ counterfactuals to states within the same census division (“close controls”), even when geographically proximate states are rejected by a data-driven synthetic control approach to generate counterfactuals. When we (1) use the state house price index and the unemployment and average wage rate among more highly educated individuals to control for state macroeconomic conditions that are less likely to capture pathways through which minimum wages affect poverty in a difference-in-differences framework, or (2) allow states outside a treatment state’s census division to serve as potential donors in a synthetic control framework, we find no evidence of poverty-reducing effects of the minimum wage over the 1983-2012 period... The 95 percent confidence intervals around our preferred estimates rule out poverty elasticities with respect to the minimum wage of less than -0.138, which include central estimates reported by Dube (2019).

In other words, Burkhauser et al. show that Dube's results are not robust to several modelling choices that Dube made. When the models are run with different control variables, or with a different selection of control states, there are no negative effects of higher minimum wages on poverty. Also:

...when we explore the most recent decade of CPS data, which captures the years following the Great Recession (2010-2019), the contemporaneous and longer-run poverty findings reported by Dube (2019) are largely absent, including in models that use Dube’s preferred macroeconomic controls or controls for spatial heterogeneity. Specifically, we find no evidence that post-Great Recession minimum wage increases had a statistically significant or economically important effect on poverty.

So, Burkhauser et al. show that Dube's results are sensitive to the choice of the time period that the dataset covers. And then:

...when we combine the two data windows discussed above and amass our “full panel” from 1983-2019, we find little support for the hypothesis that minimum wage increases reduce poverty over this 37-year period. Estimated elasticities below -0.131 for non-elderly individuals (and below -0.129 for all persons) lie outside of our 95% confidence interval, which would rule out the central long-run estimate reported by Dube (2019). Our preferred estimate shows that a 10 percent increase in the minimum wage is associated with a (statistically insignificant) 0.17 percent increase in the probability of poverty among all persons.

So, using the broader dataset from 1983 to 2019, the effect of higher minimum wages on poverty is small and statistically insignificant. Finally, Burkhauser et al. reiterate earlier findings in the literature, by showing that:

...less than 10 percent of those whose hourly wage rate would be directly impacted by a $15 minimum wage live in poor families. Approximately two-thirds live in families with incomes over two times the poverty line and nearly half live in families with incomes over three times the poverty line.

Burkhauser et al. conclude that:

In summary, our findings provide little compelling evidence that raising the minimum wage will be an effective or target efficient policy tool for alleviating poverty.

Burkhauser et al.'s paper is a comprehensive and systematic take-down of Dube's earlier work. And, it reestablishes the earlier consensus - higher minimum wages do not reduce poverty (at least, in the US - the paper I discussed in this earlier post showed some short run, but not long run, effects on poverty in Brazil). As with all research, it pays not to overcorrect greatly on the basis of a single new research paper. Policy makers would do well to remember that.

[HT: Marginal Revolution, back in 2023]

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