Economy / Politics

Why a $15 Minimum Wage Won’t Help Those in Poverty

Demonstrators prepare signs supporting the raising of the federal minimum wage during May Day demonstrations in New York

Demonstrators prepare signs supporting the raising of the federal minimum wage during May Day demonstrations in New York. REUTERS/Lucas Jackson 

During his Presidential campaign Bernie Sanders declared, “The current federal minimum wage is a starvation wage. It’s got to be raised to a living wage.” That living wage is often thought to be a $15 an hour minimum wage that has been vigorously advocated for by Democratic politicians. However, increases to the federal minimum wage have failed to gain traction, remaining at $7.25 an hour since 2009. States and cities have stepped in and raised their own minimum wages, as D.C. lawmakers recently approved a $15 minimum wage, joining New York and California, two states that have passed legislation to raise the minimum wage to $15 by 2022. Although intended to benefit low-income workers and help families that are struggling in poverty, there are many less obvious downsides to an artificially high minimum wage that hurts the very group it is meant to help.

A $15 minimum wage will eventually lead to a decrease in overall employment with the greatest decrease concentrated among low-experience and low-skill workers. The Heritage Foundation reported in the long run a 10% increase in labor costs causes firms to reduce employment of low-skilled workers by an average of 6.8%. This is due to the high costs associated with hiring an additional full time worker at $15 an hour, which the Heritage Foundation estimates will cost employers at least $38,700[1] a year. This incentivizes employers to reduce employment and only hire workers that will create enough productivity to cover these new costs. This results in less-experienced and low-skilled workers being replaced by more productive substitutes of labor, such as technology or workers with more education, skill, and experience. The American Action Forum predicted the total jobs lost due to the $15 minimum wage would be 16.8 million jobs, with 3.3 million jobs being low-wage jobs.

Some proponents of a $15 minimum wage use the case of Seattle to argue that these predictions are exaggerated. Seattle passed an ordinance that gradually increases the minimum wage to $15 by 2017 and on the surface it looks as if Seattle’s employment has not declined. However, a study performed by the University of Washington suggests Seattle’s strong economy may have mitigated any negative effects. After controlling for Seattle’s economy the study found only 25% of the observed income gains were attributed to the $15 minimum wage, businesses that heavily employ low-wage staff decreased employment, and for Seattle’s lowest-wage earners, their employment rate decreased about 1%, their average worker hours declined, and 2%-3% of low-wage workers sought employment outside of Seattle.

Additionally, it should be noted the study of Seattle is an early analysis of the effects of the increased wage, not a long term analysis, which is when most of the negative economic consequences take effect. Since the ordinance, Seattle has seen a wage increase from $9.47 to $11, and due to Seattle’s strong economy, some economists argue that increase would have happened naturally. According to the Heritage Fund, most states would need to raise wages by 50%-100% to reach $15. Most cases studies about minimum wage have included analysis of mediocre raises to the minimum wage, not to the magnitude of the proposed increase to $15. Believing such findings in Seattle are representative of the country as a whole is a gross assumption. Seattle is a premature and inefficient analysis, unable to predict the long term effects of such a large wage hike in states of poor economic growth.

Even if employment does not decrease after an increase to a $15 wage, the majority of workers that would experience the wage increase are not in households under the poverty threshold. In 2014, the CBO examined the impact of raising the federal minimum wage to $9 and $10.10 per hour, two popular proposals at the time. For the $10.10 proposal, the CBO concluded that only 19% of additional earnings from the wage increase would go to families below the poverty threshold. Using the CBO report, the American Action Forum predicts only 6.7% of the net income increase from raising the minimum wage to $15 per hour would go to families in poverty.

Reality is a hard pill to swallow, but a $15 minimum wage would do little to help the poor. The increased wages effect a small proportion of its intended beneficiary, lifting very few households out of poverty. The small economic benefit felt by low-income workers is less than the overwhelming decrease in employment of these workers, creating a negative net effect. If policymakers and politicians want to help raise families and individuals from poverty, a $15 minimum wage is not the solution. Such a policy would leave many without jobs, elevating the U.S. poverty crisis.

 

[1] This figure includes total costs of wage and fringe benefits.

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