By eliminating jobs and/or reducing employment growth, economists have long understood that adoption of a higher minimum wage can harm the very poor who are intended to be helped. Nonetheless, a political drumbeat of proposals—including from the White House—now calls for an increase in the $7.25 minimum wage to levels as high as $15 per hour.
Such demands assume that the additional income for lower-income households would come from flush firms or wealthy households. But this groundbreaking paper by Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office, and Ben Gitis, director of labor-market policy at the American Action Forum, comes to a strikingly different conclusion: not only would overall employment growth be lower as a result of a higher minimum wage, but much of the increase in income that would result for those fortunate enough to have jobs would go to relatively higher-income households—not to those households in poverty in whose name the campaign for a higher minimum wage is being waged.
Specifically, using time-tested modeling techniques, such as those that Holtz-Eakin used while at the CBO, the authors found that a $15-per-hour minimum wage could mean the loss of 6.6 million jobs. What’s more, despite the fact that there would be some Americans whose wages would be lifted by a higher minimum wage, the effect on the poor would be minimal—of the increase in income for low-wage workers, only 6.7 percent would go to families in poverty. In other words, this is reverse–Robin Hoodism: taking jobs and income from the poorest to give to those who are better-off. The wealthy, whom demagogues now attack, would be untouched.
As the minimum-wage debate proceeds, it’s important to keep in mind that work itself benefits those of modest means. The first job, even at relatively low pay, provides that first step on the ladder of upward mobility. Eliminating those rungs on the ladder threatens the future of workers who are starting out today. There are far better ways—including the Earned Income Tax Credit, targeted wage supplements, and, of course, a more effective public-education system—to assist low-income Americans and to make work pay, while not reducing job growth. As this paper makes clear, the poor cannot afford counterproductive initiatives advanced in their name but harmful to their lives.
President, Manhattan Institute for Policy Research
We examine the employment effects and antipoverty implications of raising the federal minimum wage to $12 per hour and to $15 per hour, respectively, by 2020. We focus on how raising the federal minimum wage would affect the very low-wage workers whom the policy is intended to help. Overall, we find significant trade-offs in raising the federal minimum wage.
While a minimum-wage hike would benefit millions of workers with higher earnings, it would also hurt millions of others who would lose earnings because they cannot attain or retain a job. Our estimates show that raising the federal minimum wage to $12 per hour by 2020 would affect 38.3 million low-wage workers. Using our central estimate, we find that raising the minimum wage would cost 3.8 million low-wage jobs. In total, income among low-wage workers would rise by, at most, $14.2 billion, of which only 5.8 percent would go to low-wage workers who are actually in poverty.
Similarly, we find that increasing the federal minimum wage to $15 per hour by 2020 would affect 55.1 million workers and cost 6.6 million jobs. Aggregate income among low-wage workers would rise by $105.4 billion, after accounting for income declines from job losses. However, only 6.7 percent of the increase in income would go to workers who are actually in poverty.
Because the exact effect of the minimum wage on employment remains unsettled, we check the robustness of our results by employing a range of estimates from the literature that imply modest, moderate, and severe employment consequences. In each case, we analyze how the change in earnings resulting from a minimum-wage increase would be distributed across income levels.