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Thursday, October 8, 2015

Will Raising the Minimum Wage Lift Full Time Workers Out of Poverty?

The argument begs the question

Critics of the minimum wage used to be able to respond to arguments for raising it by stretching the logic to its extremes. If $10 is so great, why not $20 or $50 an hour? The reductio ad absurdum should cause even the staunchest minimum wage advocate to ponder the potential unintended consequences of their ideas. (For more on the minimum wage, see “3 Reasons the $15 Minimum Wage Is a Bad Way to Help the Poor.”)

Unfortunately, we now live in a world where caricatures have become reality. Sen. Elizabeth Warren wonders why we don’t have a $22 minimum wage (I explain why she doesn’t have much to ponder here), and Sen. Bernie Sanders has now joined the “Fight for Fifteen.”

For the moment, let’s set aside the economic debate over whether the minimum wage costs jobs. (The CBO, majority of economists, and majority of empirical studies pretty much say it all.)

Instead, let’s address Sanders and Warren’s moral argument for hiking the minimum wage to such levels: that “no one who works full time should have to live in poverty.” 

Given the unintended consequences of the minimum wage, perhaps they would rather have people living in poverty because they can’t find work at all. 

Regardless, their claim is a normative argument with no positive factual foundation.

For starters, let’s just look at poverty thresholds from 2014 and compare them to what a full time minimum wage worker earns.

Persons in Family/Household

Poverty Guideline









Excludes Hawaii and Alaska. Add $4,670 for each additional person.

A person working forty hours a week, fifty weeks a year at the federal minimum wage of $7.25 an hour would earn $14,500, pre-tax. This is enough to put a single earner over the poverty line, while still being eligible for various benefits like Medicaid and the earned income tax credit (EITC).

The EITC alone raises the effective minimum wage of a single mother with two kids to $10.44 an hour (or to $20,880 a year), so even she wouldn’t be far from the poverty line (again, not counting any other welfare or child support).

Keep in mind also that most minimum wage workers are not supporting families or even themselves. Half of minimum wage workers are below the age of 25, and the average income of the household those earners live in is $65,900 a year. Older minimum wage workers, on average, live in households with incomes over $42,500.

A larger percentage of minimum wage earners do live in homes at or below the poverty line than the national average, but bear in mind that most of them are also working part time.

What difference does working full time make? In 2013, the percentage of full time workers who earned an income below the poverty line was just 2.7 percent, while overall poverty rate (for all Americans, employed or not) was 14.5 percent

Although it may have been bad politics when Jeb Bush said that Americans should work more hours to earn more, it wasn’t as dumb as the media played it.

In fact, after comparing income with poverty thresholds, the only way someone earning minimum wage could live in poverty would be to not work full time or to have a large family with relatively few earners in the household.

Economist Walter Williams was on to something when he listed his five steps to staying out of poverty: graduate from high school, don’t have children until married, stay married, work any job, and stay out of jail. Williams put the poverty rate among individuals who meet that criteria at 8 percent — the best improvement to his advice would be “work any job — and do it full time.”

In practice, the minimum wage undercuts that route by reducing the number of jobs and encouraging employers to conserve on labor by cutting hours. The argument that “nobody who works full time should live in poverty” ignores the fact that currently hardly anyone does and the reality that raising the minimum wage will make it more difficult for marginal workers to get and keep that employment in the first place.