Will a minimum wage hike allay poverty?

The new Democratic-controlled House of Representatives has approved an increase in the federal minimum wage, and the Senate almost certainly will pass a similar bill. The House bill would raise the wage floor in three steps, from the current $5.15 an hour to $7.25 in 2009.

Liberals believe that a higher federal minimum wage would help many poor people. Conservatives strongly disagree. If the House bill becomes law, its impact on poverty will depend on the answers to these questions:

Will a higher federal minimum wage lead to widespread layoffs of unskilled workers, as conservatives believe?

If it does raise the incomes of many unskilled workers, would this greatly help the 38 million people in poverty?

How will a higher federal minimum interact with the current state minimum wages to shape the ultimate impact on poverty?

Most studies by economists show that hikes in the minimum wage reduce employment, according to a careful 2006 review of 86 studies completed since 1991. Many of the studies concluded, though, that the negative effects on employment are small – apparently, a boost in the federal minimum would not lead to widespread layoffs. So most of the 5.6 million people earning less than $7.25 would keep their jobs, and the higher minimum wage would boost their incomes.

Because the minimum wage increase would raise the incomes of several million minimum-wage workers, and would have few negative side effects, it deserves support.

Does this mean that a minimum wage increase would make a big dent in American poverty? No, it would not. Two of the reasons are that most people working for the minimum wage are not poor, and many of the poor do not work.

Teenagers account for 30 percent of those paid less than $7.25 an hour, and many live with their parents, who help support them. It is estimated that 62 percent of the wage gains resulting from a higher minimum would go to workers in households in the top 80 percent of earnings. Though most of these families have modest incomes, almost all are above the poverty level.

According to a 2005 Census Bureau survey, over half of the working-age people in poverty did not work in the previous 12 months; a higher minimum wage clearly would be of no help to these people.

The impact of a minimum wage increase on workers’ eligibility for several social programs, including food stamps, Medicaid and subsidized housing, is often overlooked. These programs are available only to low-income people. Wage increases would make some workers ineligible for the programs, and cause others to receive lower benefits. Some benefits of a higher minimum wage would be lost.

How would a boost in the federal minimum wage interact with existing state minimum wage provisions? Lawmakers in 29 states and the District of Columbia, dismayed by the low federal minimum wage, have set their own higher minimums, and more than half of U.S. workers live in these states.

These laws would reduce the impact of a higher federal minimum. In Maine, the current minimum wage is $6.75, and it will rise to $7 in October. Until 2009, this $7 Maine minimum wage would be higher than the proposed federal minimum. In 2009, when the $7.25 federal minimum would finally go into effect, Maine minimum wage workers would get only a 25-cent increase. In many other states, the proposed federal minimums also would bring few net benefits.

Many poor Maine workers would not be helped by a $7.25 minimum wage. For example, according to U.S. Bureau of Labor Statistics data, well over half of the Bangor area’s fast food cooks, janitors and maids earned more than this in 2005. Many workers already earning slightly above $7.25 – for example, single parents not working full time – have incomes below the poverty line, and they would be not be helped by a $7.25 wage.

The recently passed House bill is clearly a blunt instrument for dealing with our national poverty problem. Even for the working poor, some potential benefits of a higher minimum wage would be lost through the eligibility rules of social programs and the effects of state minimum wage laws. Still, on balance a higher federal minimum wage probably would help many low-wage workers, including some with incomes below the poverty level. President Bush should not veto this bill.

A more effective way to reduce poverty would be to expand the federal Earned Income Credit program. Under the EIC program, increased wages actually raise payments to some – though not all – of the covered working families. So this program reinforces the incentive to work, unlike programs that end workers’ eligibility or reduce their benefits when they receive higher wages. A way to help the nonworking poor would be to ease the eligibility requirements of these other programs.

We easily could pay for these improvements by reversing those parts of the Bush tax cuts that benefit only the wealthiest Americans. Congressional Democrats have promised such a reversal. Let us hope they succeed, and also that they put their new muscle behind an expansion of the EIC and other programs that can reduce poverty.

Edwin Dean, a seasonal resident of Vinalhaven, writes monthly about economic issues.