The Minimum Wage is Effective and Well Targeted
In a recent column, David Brooks argued that increasing the minimum wage is an ineffective response to income inequality because it would do little to raise workers above the poverty level. Instead, he contends, most of the benefits would go to those higher up the income scale. But Brooks’s understanding of the minimum wage’s role is too narrow. The central purpose of the minimum wage is not to lift the poor above the poverty line—it’s to raise the incomes of low-income workers and their families, not just those below the poverty threshold. Current research suggests that minimum-wage increases are well targeted to improving lower-income individuals’ economic condition. This is contrary to the persistent myth that the minimum wage primarily benefits young workers in high-income households.
The argument made by Brooks, and others who focus narrowly on poverty, is specious for several reasons. First, it conflates poverty and inequality. While related, they are not one and the same. Second, the poverty line is both arbitrary and woefully lacking as a measure of well-being. As currently defined, the poverty line is more descriptive of destitution than mere poverty. At $22,111 for a family of two adults and two children, it is less than a quarter of the income needed for a modest but secure living standard in New York City, and just 37 percent of the income needed in rural Nebraska. Third, it is not a weakness but a strength of the minimum wage that it not only improves the well-being workers above the poverty level who are nevertheless struggling to make ends meet. After all, its purpose is to be a floor that supports broad-based wage growth.
A look at Current Population Survey data demonstrates that the minimum wage is well-targeted to low-income populations. Let us consider three groups of low-wage workers and the households they come from. The workers will be grouped according to their wages:
- Those earning within 3 percent of the minimum wage (the plus or minus 3 percent band allows for respondents rounding their hourly wage response)
- Those earning up to 110 percent of the minimum wage
- Those earning as much as 125 percent of the minimum wage
The households these workers come from will be grouped into the following income ranges:1
- Less than $20,000
- $100,000 and above
In 2012, 57 percent of those whose earnings placed them in the lowest wage category (i.e., within 3 percent of the minimum wage) were from households in the two lowest income categories (i.e., with incomes below $35,000). More than 78 percent of those in the lowest wage category are from households below the U.S. median income (i.e., below $50,000).2 About half of those earning wages no more than either 110 percent or 125 percent of the minimum come from households in the two lowest income categories, and three quarters come from households below the median. President Obama has proposed increasing the federal minimum wage by almost 40 percent in three steps, to $10.10 per hour. Of those earning no more than $10.10 in 2012, 49 percent were from households in the two lowest income categories, and 73 percent were from households below the U.S. median.
We can turn this analysis around and consider the fraction of workers in each household income category who have low wages. In 2012, of workers from households with annual incomes below $35,000, 11 percent were in the lowest wage category, 18 percent earned no more than 110 percent of the minimum wage, and 35 percent earned no more than 125 percent of the minimum wage. These workers were about twice as likely to be earning close to the minimum wage as those from households with annual incomes greater than $50,000.
As this analysis demonstrates, the minimum wage is reasonably well targeted toward low-income populations. Although some from higher-income households benefit from boosts in the minimum wage, those in the lower half of the U.S. income distribution—particularly those even closer to the bottom of the income distribution—receive the lion’s share of gains. Although we do not yet know enough about the effect of the minimum wage on low-income families, we know enough to dispel the myth that most benefits go to teens and younger workers from high-income families. Moreover, at a time when tuition costs are soaring and the future well-being of an entire generation is at risk due to crippling student debt levels, to the extent that the minimum wage does benefit young workers, this is surely a positive thing.
Dale Belman and Paul Wolfson have recently completed a review of research on the minimum wage, What Does the Minimum Wage Do? (forthcoming) for the W. E. Upjohn Institute for Employment Research of Kalamazoo, Michigan.
1. About 10 percent and 15 percent of employed individuals, respectively, come from households in the two lowest income categories, while each of the other three categories contains about one quarter of employed persons.
2. The Current Population Survey uses income categories rather than actual household incomes, and one of its category boundaries is $50,000. This is close enough to median household income in 2012, $51,000, that we refer to it as the11 median income.