1 Fighting Poverty with Mandated Wage Floors David Neumark.

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Fighting Poverty with Fighting Poverty with Mandated Wage FloorsMandated Wage Floors

David NeumarkDavid Neumark

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OutlineOutline

Mandated wage floors and poverty reductionMandated wage floors and poverty reduction

Employment effectsEmployment effects

Effects on low-wage workers: winners / losersEffects on low-wage workers: winners / losers

Effects on poor and low-income families Effects on poor and low-income families

The EITC and the minimum wageThe EITC and the minimum wage

Summary and conclusionsSummary and conclusions

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Minimum wages and living wages pitched Minimum wages and living wages pitched as tools to fight povertyas tools to fight poverty

““I intend to do all I can to see that the minimum I intend to do all I can to see that the minimum wage is increased this year. No one who works wage is increased this year. No one who works for a living should have to live in poverty.” for a living should have to live in poverty.” (Senator Edward Kennedy)(Senator Edward Kennedy)

Minimum wages will “raise the living standards Minimum wages will “raise the living standards of 12 million Americans” (President Bill Clinton)of 12 million Americans” (President Bill Clinton)

““The living wage is a crucial tool in the effort to The living wage is a crucial tool in the effort to end poverty” (Economic Policy Institute)end poverty” (Economic Policy Institute)

““[T]he basic premise of the living wage [T]he basic premise of the living wage movement is simple: that anyone in this country movement is simple: that anyone in this country who works for a living should not have to raise a who works for a living should not have to raise a family in poverty” (Pollin and Luce)family in poverty” (Pollin and Luce)

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Distributional effects ambiguous: wage Distributional effects ambiguous: wage floors create winners and losers floors create winners and losers

Gains occur for workers whose wages rise, Gains occur for workers whose wages rise, who keep their jobs, and whose hours are not who keep their jobs, and whose hours are not reduced reduced

Losers include workers whose employment Losers include workers whose employment prospects worsen, or for whom hours prospects worsen, or for whom hours declines more than offset wage increasesdeclines more than offset wage increases

Distributional effects are complicated by Distributional effects are complicated by disjunction between low-wage workers and disjunction between low-wage workers and low-income familieslow-income families

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Overview of findings from 20+ years of Overview of findings from 20+ years of researchresearch

Minimum wages and living wages cause Minimum wages and living wages cause employment declines among the less-skilledemployment declines among the less-skilled

Minimum wages may lead to more poor families; Minimum wages may lead to more poor families; no evidence establishes that they reduce no evidence establishes that they reduce povertypoverty

Living wages have more favorable distributional Living wages have more favorable distributional effects and may reduce povertyeffects and may reduce poverty

EITC is superior policyEITC is superior policy

– Combining EITC with minimum wage may Combining EITC with minimum wage may have additional distributional benefitshave additional distributional benefits

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OutlineOutline







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Predictions of economic theoryPredictions of economic theory

Economists predict that when something Economists predict that when something becomes more expensive, agents use less of becomes more expensive, agents use less of itit– GasGas– Cigarette taxesCigarette taxes

In context of wage floors, “agents” are the In context of wage floors, “agents” are the owners of firms, deciding how much labor to owners of firms, deciding how much labor to employemploy– Just as consumers substitute away from Just as consumers substitute away from

goods that become more expensive, firms goods that become more expensive, firms substitute away from inputs that become substitute away from inputs that become more expensive more expensive

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Important exceptionsImportant exceptions

With skilled and unskilled labor, employment With skilled and unskilled labor, employment of unskilled will fall, but employment of of unskilled will fall, but employment of skilled may riseskilled may rise

– Overall effect almost surely negative, but Overall effect almost surely negative, but could be smallcould be small

If there is uncovered sector, employment may If there is uncovered sector, employment may rise there; and if uncovered sector large, rise there; and if uncovered sector large, overall employment may not fall muchoverall employment may not fall much

– More relevant to living wage than to More relevant to living wage than to minimum wageminimum wage

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What does theory predict about What does theory predict about distributional distributional effects of wage floors? effects of wage floors?

Evidence of disemployment effects does not Evidence of disemployment effects does not imply that wage floors are bad policyimply that wage floors are bad policy

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How do we estimateHow do we estimateeffects of wage floors on employment? (I)effects of wage floors on employment? (I)

Earlier research on which long-standing Earlier research on which long-standing consensus on minimum wages was based was consensus on minimum wages was based was problematicproblematic

– Used changes in Used changes in nationalnational minimum wageminimum wage

– Increases were infrequentIncreases were infrequent

– Increases associated with other changes, like Increases associated with other changes, like business cyclebusiness cycle

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How do we estimateHow do we estimateeffects of wage floors on employment? (II)effects of wage floors on employment? (II)

Minimum wage research begun in 1990s exploits Minimum wage research begun in 1990s exploits variation introduced by state minimum wagesvariation introduced by state minimum wages

– Compared experiences in similar states with Compared experiences in similar states with and without minimum wage increases and without minimum wage increases

– Standard method in empirical policy researchStandard method in empirical policy research

– Also applied to research on living wages, at the Also applied to research on living wages, at the city levelcity level

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Overwhelming evidence that minimum Overwhelming evidence that minimum wages reduce employment of least-skilledwages reduce employment of least-skilled

I authored a number of studies beginning in I authored a number of studies beginning in early 1990searly 1990s

Recently reviewed over 100 studies for the U.S. Recently reviewed over 100 studies for the U.S. and elsewhere since then (Neumark and and elsewhere since then (Neumark and Wascher, 2007)Wascher, 2007)

– Important exceptions, but 2/3 of studies show Important exceptions, but 2/3 of studies show negative effects, and about 85% of the more negative effects, and about 85% of the more reliable studies doreliable studies do

– The more studies focus on the very least-The more studies focus on the very least-skilled most affected by minimum wages, the skilled most affected by minimum wages, the stronger the evidence of disemployment stronger the evidence of disemployment effects effects

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Summary measure of disemployment Summary measure of disemployment effect of minimum wageeffect of minimum wage

Some remaining dispute, but earlier Some remaining dispute, but earlier consensus largely restoredconsensus largely restored

– Journal of Economic LiteratureJournal of Economic Literature survey: survey: “best estimate” of minimum wage elasticity “best estimate” of minimum wage elasticity for young workers: − 0.1 to − 0.2for young workers: − 0.1 to − 0.2

– E.g., elasticity of E.g., elasticity of −− 0.2 implies that 10% 0.2 implies that 10% increase in minimum reduces employment increase in minimum reduces employment by 2%by 2%

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What about living wages? What about living wages?

Living wages differ from minimum wages in Living wages differ from minimum wages in important waysimportant ways

High wage floorsHigh wage floors Narrow coverageNarrow coverage– Contractors and subcontractors Contractors and subcontractors – Business/financial assistance recipientsBusiness/financial assistance recipients– City employeesCity employees

Because of coverage and wage levels, much Because of coverage and wage levels, much more concentrated on adults than teenagers, more concentrated on adults than teenagers, in contrast to minimum wagesin contrast to minimum wages

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Largely the same answer with regard to Largely the same answer with regard to employment effectsemployment effects

-20-20

-15-15

-10-10

-5-5

00

55

1010

Wage effectsWage effects


Contractor-onlyContractor-onlyBusiness assistanceBusiness assistance

Effects on wages and employment rate in Effects on wages and employment rate in bottom 10bottom 10thth of wage/skill distribution: of wage/skill distribution:

100% increase in living wage100% increase in living wage

% change% change

Adams and Adams and Neumark (2004)Neumark (2004)

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OutlineOutline







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Does “moderate” disemployment effect Does “moderate” disemployment effect imply low-wage workers helped?imply low-wage workers helped?

““Back-of-the-envelope” calculationBack-of-the-envelope” calculation

– With elasticity of With elasticity of −−0.2, and 0.2, and 10% increase in minimum10% increase in minimum

• 2% lose their job2% lose their job

• 98% get 10% raise98% get 10% raise

• Average income of low-wage workers up Average income of low-wage workers up by (.98 x 10) – (.02 x 100) = 7.8%by (.98 x 10) – (.02 x 100) = 7.8%

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But disemployment effect is worse for But disemployment effect is worse for those actually affected by wage floorthose actually affected by wage floor

80% above 80% above minimumminimum

20% at 20% at minimumminimum AverageAverage

WagesWages No changeNo change Up 10%Up 10% Up 2%Up 2%

EmploymentEmployment No changeNo change Down 10%Down 10% Down 2%Down 2%

EarningsEarnings No changeNo change No changeNo change No changeNo change

Correct calculationCorrect calculation10% minimum wage increase10% minimum wage increase

10% employment10% employment declinedecline

Incorrect calculationIncorrect calculation 2% employment decline2% employment decline

10% minimum wage increase10% minimum wage increase

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How do minimum wages affect workers at How do minimum wages affect workers at or near the minimum?or near the minimum?

-8-8

-6-6

-4-4

-2-2

00

22

44

66WagesWages

HoursHours

EmploymentEmployment

Earnings Earnings

Estimated response to 10% increase in minimum wageEstimated response to 10% increase in minimum wage

At At minimum minimum

wagewage

1.1 x 1.1 x minimumminimum

1.5 - 2 x 1.5 - 2 x minimumminimum

% % changechange

Neumark, Neumark, Schweitzer, and Schweitzer, and Wascher (2004)Wascher (2004)

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OutlineOutline







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What do effects on low-wage workers What do effects on low-wage workers imply for low-income families?imply for low-income families?

Low-wage workers and low-income families Low-wage workers and low-income families not synonymousnot synonymous

Low-wage workers over-represented in poor Low-wage workers over-represented in poor and low-income families, but many are in and low-income families, but many are in higher-income familieshigher-income families

– No one (Card and Krueger, EPI) disputes No one (Card and Krueger, EPI) disputes that minimum wages target poor families that minimum wages target poor families badlybadly

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Many low-wage workersMany low-wage workersare in high-income familiesare in high-income families

Burkhauser and Sabia (2007)Burkhauser and Sabia (2007)

Distribution of low-wage workers (< 50% of average wage)Distribution of low-wage workers (< 50% of average wage)

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Estimating effects of minimum wages on Estimating effects of minimum wages on income distribution (I)income distribution (I)

Parallels other analyses, but with family as Parallels other analyses, but with family as unit of observationunit of observation

StrategyStrategy

– Trace out entire income distribution by Trace out entire income distribution by state and yearstate and year

– Compare changes in income distribution in Compare changes in income distribution in states raising minimum wage to changes in states raising minimum wage to changes in other statesother states

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Estimating effects of minimum wages on Estimating effects of minimum wages on income distribution (II)income distribution (II)

No minimum No minimum wage increasewage increase

Minimum Minimum wage increasewage increase

Year 1 income distribution (white) Year 1 income distribution (white) Year 2 income distribution (green) Year 2 income distribution (green)

% % familiesfamilies

% % familiesfamilies

Income / NeedsIncome / Needs

Income / NeedsIncome / Needs11

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Higher minimum wage increases number Higher minimum wage increases number of low-income / poor families (estimates)of low-income / poor families (estimates)

Effect of average increase in sample period (1986-1995) ≈ 45 centsEffect of average increase in sample period (1986-1995) ≈ 45 cents

Neumark, Schweitzer, and Wascher (2005)Neumark, Schweitzer, and Wascher (2005)

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Higher minimum wage increases number Higher minimum wage increases number of low-income / poor families (estimates)of low-income / poor families (estimates)

-0.8-0.8

-0.6-0.6

-0.4-0.4

-0.2-0.2

00

0.20.2

0.40.4

0.60.6

0.80.8

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0-1 0-1 (poor)(poor)

1-1.51-1.5(near-poor)(near-poor)

1.5-21.5-2 2-32-3

Change Change in %in %

Income / NeedsIncome / Needs

Neumark, Schweitzer, and Wascher (2005)Neumark, Schweitzer, and Wascher (2005)

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How can higher minimum wagesHow can higher minimum wagesincrease poverty?increase poverty?

Winners: Teens from affluent families?Winners: Teens from affluent families? Losers: Adult heads of poor, low-income Losers: Adult heads of poor, low-income

households? Secondary earners in non-poor, low-households? Secondary earners in non-poor, low-income families (NSW, 2005)income families (NSW, 2005)

Related resultsRelated results– Minimum wages result in redistribution of Minimum wages result in redistribution of

income among low-income families (NW, 2002), income among low-income families (NW, 2002), and redistribution of jobs among low-wage and redistribution of jobs among low-wage workers (NW, various) workers (NW, various) • Long-term minimum wage workersLong-term minimum wage workers

hurt the most (Lang and Kahn, 1998)hurt the most (Lang and Kahn, 1998) Results consistent with other research (e.g., Wu Results consistent with other research (e.g., Wu

et al., 2006)et al., 2006)

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Living wages have more beneficial Living wages have more beneficial distributional effectsdistributional effects

-5-5

-4-4

-3-3

-2-2

-1-1

00

50% of50% ofpoverty linepoverty line

PovertyPovertylineline

150 % of150 % ofpoverty linepoverty line

200% of 200% of poverty linepoverty line

Change in likelihood that family falls below income Change in likelihood that family falls below income threshold: 100% increase in living wagethreshold: 100% increase in living wage

PercentagePercentagepoint changepoint change

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Results reveal the “good” and “bad” Results reveal the “good” and “bad” aspects of living wagesaspects of living wages

Living wages reduce poverty and help Living wages reduce poverty and help low-income families somewhat above the low-income families somewhat above the poverty linepoverty line

Living wages do Living wages do not not increase the “depth” increase the “depth” of povertyof poverty

But results also suggest that these laws But results also suggest that these laws do not help the poorest familiesdo not help the poorest families

– Not surprising, given lower employment Not surprising, given lower employment rates, and that disemployment effects rates, and that disemployment effects fall on least-skilledfall on least-skilled

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OutlineOutline




Effects on poor and low-income familiesEffects on poor and low-income families



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EITC vs. wage floors – theoryEITC vs. wage floors – theory

In theory, EITC seems more promising than In theory, EITC seems more promising than wage floorswage floors

– Raises income by encouraging work among Raises income by encouraging work among less-skilled, especially female heads of less-skilled, especially female heads of household household

– Vs. minimum wage, which taxes hiring of Vs. minimum wage, which taxes hiring of less-skilledless-skilled

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EITC vs. wage floors – evidenceEITC vs. wage floors – evidence

Unambiguous evidence that EITC increases Unambiguous evidence that EITC increases labor force attachment and earnings of low-labor force attachment and earnings of low-income families with children (e.g., Eissa and income families with children (e.g., Eissa and Liebman, 1996)Liebman, 1996)

Large share of payments goes to poor families Large share of payments goes to poor families (Liebman, 1998; Scholz, 1994)(Liebman, 1998; Scholz, 1994)

EITC outperforms minimum wage in terms of EITC outperforms minimum wage in terms of beneficial effects on distribution of family beneficial effects on distribution of family earnings/income (NW, 2001; Wu et al., 2006; earnings/income (NW, 2001; Wu et al., 2006; Burkhauser et al., 1996)Burkhauser et al., 1996)

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Minimum wage-EITC interactions?Minimum wage-EITC interactions?

Labor supply response to EITC will reduce Labor supply response to EITC will reduce market wage, employment, incomes of low-market wage, employment, incomes of low-skilled ineligibles (Leigh, 2007; Rothstein, 2007)skilled ineligibles (Leigh, 2007; Rothstein, 2007)– Can higher minimum wage offset these Can higher minimum wage offset these

adverse effects? adverse effects? – Unlikely, because raising binding wage floor Unlikely, because raising binding wage floor

will simply strengthen disemployment effectswill simply strengthen disemployment effects More plausible is that EITC may not be enough More plausible is that EITC may not be enough

to draw single mothers into labor market, but to draw single mothers into labor market, but combining EITC with minimum wage may do socombining EITC with minimum wage may do so

Combining two policies can Combining two policies can enhance enhance beneficial beneficial effects of EITC on poor families with children, effects of EITC on poor families with children, but worsen outcomes for childless men (and but worsen outcomes for childless men (and teenagers)teenagers)

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Does a higher minimum wage make the Does a higher minimum wage make the EITC more effective?EITC more effective?

NW (2009): EITC interacts with the minimum NW (2009): EITC interacts with the minimum wage to amplify the labor supply response, wage to amplify the labor supply response, increase in earnings, and reduction in poverty increase in earnings, and reduction in poverty among single mothersamong single mothers

But combination of EITC and minimum wage But combination of EITC and minimum wage has adverse effects on the employment and has adverse effects on the employment and earnings of less-skilled and minority men, earnings of less-skilled and minority men, (especially without children in the home)(especially without children in the home)

Benefits to single mothers come at a cost, with Benefits to single mothers come at a cost, with minimum wages exacerbating the potentially minimum wages exacerbating the potentially adverse effects of the EITC on this groupadverse effects of the EITC on this group

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OutlineOutline




Effects on poor and low-income familiesEffects on poor and low-income families



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Minimum wage effects unambiguously badMinimum wage effects unambiguously bad

Minimum and living wages reduce employment Minimum and living wages reduce employment of less-skilled workers, as theory predictsof less-skilled workers, as theory predicts

Aggregate disemployment effects moderate, but Aggregate disemployment effects moderate, but low-wage workers, on net, hurt by minimum low-wage workers, on net, hurt by minimum wageswages

Minimum wages increase povertyMinimum wages increase poverty

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Living wages offer more, but limited, Living wages offer more, but limited, promisepromise

Living wages have more beneficial Living wages have more beneficial distributional effects, helping poor and lower-distributional effects, helping poor and lower-income families, but not the least well offincome families, but not the least well off

– Can’t conclude that extending living wage Can’t conclude that extending living wage more broadly would generate similar benefitsmore broadly would generate similar benefits

– Greater breadth would make them more like Greater breadth would make them more like minimum wages, with adverse distributional minimum wages, with adverse distributional effects effects

– Narrowly-targeted wage floors may Narrowly-targeted wage floors may sometimes work, but who should benefit?sometimes work, but who should benefit?

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EITC far more effective, for women with EITC far more effective, for women with childrenchildren

EITC is better way to fight povertyEITC is better way to fight poverty– But can harm low-skilled, childless menBut can harm low-skilled, childless men

Effects—in Effects—in bothboth directions—appear to be directions—appear to be enhanced by higher minimum wageenhanced by higher minimum wage– Extending EITC to low-skilled, childless men Extending EITC to low-skilled, childless men

would reduce benefits for poor female would reduce benefits for poor female household headshousehold heads

Not surprisingly, even the most effective Not surprisingly, even the most effective redistributional policies present tradeoffs, and redistributional policies present tradeoffs, and some are between different low-income some are between different low-income individuals and familiesindividuals and families

1 Fighting Poverty with Mandated Wage Floors David Neumark.

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