Thursday, April 14, 2016

Why the Minimum Wage Is Bad at Reducing Poverty: It's Badly Targeted and Hurts as Much as It Helps By Chris Edwards

April 13, 2016

California and New York have approved bills to increase their state minimum wages over time to $15 an hour. Presidential candidates Hillary Clinton and Bernie Sanders favor raising the federal minimum wage. But such mandated increases do more harm than good, and they hurt the exact groups of people that policymakers say that they want to help.

Labor economist Joseph Sabia of San Diego State University summarized the academic evidence on minimum wages in this 2014 bulletin for Cato.

Sabia’s own statistical research with economist Richard Burkhauser “found no evidence that minimum wage increases were effective at reducing overall poverty rates or poverty rates among workers.” And a study by economists David Neumark and William Wascher “found that while some poor workers who kept their jobs after minimum wage increases were lifted out of poverty, others lost their jobs and fell into poverty.”

Sabia said that there are two key reasons why the minimum wage does not alleviate overall poverty the way that supporters believe that it will. The first reason is that minimum wages reduce the work available for low-skill workers:

Many firms respond to minimum wage increases by substituting away from low-skilled labor and toward other inputs. For example, grocery stores may substitute away from cashiers and toward self-checkout systems or toward higher-skilled labor. If some near-poor, low-skilled workers lose their jobs or have their hours cut as a result of minimum wage increases, then their incomes may fall, resulting in a rise in poverty among these households.

The vast majority of credible empirical evidence produced by labor economists … suggests that minimum wage increases reduce low-skilled employment. Estimates of the employment elasticity with respect to the minimum wage for low-skilled individuals generally range from -0.1 to as large as -0.3, suggesting that a 10 percent increase in the minimum wage reduces low-skilled employment by 1 to 3 percent.

The second reason that minimum wages do not alleviate poverty is that few beneficiaries of minimum wage increases live in poor households. This fact surprised me when I first read about it, but that is what the data shows. Sabia notes:

Advocates of minimum wage increases paint a vivid portrait of what they see as the typical minimum wage worker: a working single mother struggling to keep her family above the poverty line. But is this portrait accurate? Are most minimum wage workers poor or near poor?

In fact, relatively few minimum wage workers live in poor households. In a new study, Burkhauser and I examine Census data, and find that workers earning between $7.25 and $10.10 per hour—workers who would be directly affected by [a] proposed federal minimum wage increase—overwhelmingly live in non-poor households. We find that only 13 percent of workers who would be affected live in poor households, while nearly two-thirds live in households with incomes over twice the poverty line, and over 40 percent live in households with incomes over three times the poverty line. Other research suggests that poor single-female headed households make up less than 5 percent of all affected workers.

Sabia concluded his Cato bulletin: “While alleviating poverty is a widely shared goal, raising the minimum wage is unlikely to achieve that end. In reality, it is more likely to result in making many low-skilled workers worse off. The minimum wage fails to reduce net poverty because of its adverse effects on employment and poor ability to target workers living in households below the poverty threshold.”

Economist Milton Friedman said that “one of the great mistakes is to judge policies and programs by their intentions rather than their results.” Alas, that is the mistake that continues to drive the minimum wage debate in the United States.

This post first appeared at

Chris Edwards Chris Edwards

Chris Edwards is the director of tax policy studies at Cato and editor of

Why Not Deregulate Labor? By John A. Davenport


October 01, 1983

A former editor of Barron’s and Fortune, Mr. Davenport is author of The U.S. Economy and a frequent lecturer on political economy.

Despite the tendency of economists to create more problems than they solve, there seems to be a growing consensus that the American economy will gain as we lift strangling governmental regulations from industry as in the case of oil and transportation. But just below the surface, students of the business scene are beginning to ask a more far-reaching question. If deregulation is good for business, why should it not be extended to the biggest and most important market in the country, namely the labor market which today is cluttered up by minimum wage laws, over-elaborate safety and health rules, and the laws affecting so- called collective bargaining? Says Manuel Johnson, Assistant Secretary of the Treasury, “Maybe here is an idea whose time has come.”

Mr. Johnson, to be sure, is not an entirely disinterested observer. Two years ago while still teaching at George Mason University he joined hands with two academic colleagues, James T. Bennett and Dan Heldman, to publish a small book entitled Deregulating Labor Relations (Fisher Institute, $12.95).* The book has received passing attention from some learned journals but so far only a yawn from the public press. Which is too bad because this little volume puts the labor problem and the labor cost problem into a new perspective—the perspective of over-regulation.

In making good this thesis the authors assume that despite much loose talk to the contrary, a man’s work and skill is the most precious commodity he possesses and should sell in the market like any other commodity. Their second thesis is that employers questing for profit are simply middlemen between consumers on the one hand and workers on the other, and that freedom of contract is essential to human liberty. Their third thesis is that over-regulation of labor markets is becoming an extraordinarily expensive operation not only in terms of sacrifice of principle but in terms of unemployment and of loss of productivity and national output. Indeed the authors calculate that total deregulation of the labor market might produce benefits to our society amounting to a stunning one hundred and seventy billion dollars per year.

This is an amazing figure but as the authors themselves indicate, it must be handled with great care, for it includes many disparate elements. By far the largest cost of regulation, amounting to two-thirds of the total, is attributed to OSHA—the Occupational Safety and Health Administration—set up in 1973 with the best of intentions but by now transmuted into what Murray Weidenbaum has dubbed a “growth industry,” involving a huge bureaucracy and concerning itself with such minute matters as the grain and slant of ladders in our mines and factories. Here the authors argue that much of what OSHA attempts to do might better be accomplished by giving free play to market forces. Hazardous occupations will always command higher than average wage rates. Faced by such costs employers will, in the long run, be led by self-interest to put in safety equipment.

I am frankly somewhat dubious of pushing this particular argument to an extreme since, in the long run, as Keynes cynically remarked, we shall all be dead. From the Industrial Revolution forward, governments have in fact tried to lay down general rules for enterprise. The real case against OSHA is that its rules are not general but specific and have produced a veritable mare’s-nest of regulations that have not on the record diminished industrial acci dents and in fact bear hardest on intermediate firms seeking to enter the competitive race. The way out may not lie in the total decapitation of OSHA but in step-by-step reduction of its manifold and often preposterous activities.

Outrageous Unemployment

While OSHA is by far the most expensive of our experiments in regulation, it is by no means the only one making for unemployment and lost output. Hours of work and minimum wage laws are a case in point. Here the heavy hand of government not only bears down on employers but actually denies job opportunities to men and women able and willing to work outside the government standards. The evidence is now overwhelming that minimum wages in particular bear hardest on those which government in its wisdom is trying to help—the poor, the disen franchised, and minority groups in general. As Walter Williams and others have shown, the minimum wage today set at $3.35 an hour accounts in no small part for outrageously high unemployment of nearly 50 per cent among black youth. Such laws should be allowed to die on the vine as they become irrelevant due to creeping inflation. Better still, they should be eliminated entirely as an affront to the principles of a free and humane economy.

Unfortunately, as the authors make plain, such principles are negated not just by substantive regulations but by the fact that government has also sought to lay down “procedural” rules for employer-employee relations. Until the Depression Thirties trade unions in particular had to earn their way in organizing industry. The passage of the Norris- LaGuardia Act in 1932 and the subsequent National Labor Relations Act changed matters. Acting under the Commerce Clause of the Constitution, Congress granted to unions extraordinary and unique privileges. Under the new rules:

1.) Unions gain exclusive bargaining rights in a plant whenever they can command a bare majority of workers present and voting at a union election.

2.) The employer is bound to bargain with this unit whether or not he thinks it is to his interest or to the interest of his employees.

3.) Except in Right to Work states union shop contracts are tolerated under which employees must at least pay union dues as the price of a job.

4.) All labor disputes are initially thrown into an administrative agency, the NLRB, which in effect makes labor law as it goes along and is by its very nature politically motivated.

Freedom of Contract

In criticizing this form of legislation and in seeking its repeal, the authors make clear that they are not against unions, so long as they are voluntary associations, nor against collective bargaining in so far as it proves a useful tool in determining pay and working conditions. What they consider unwarranted and unjustifiable is the government’s mandating a particular form of such bargaining wherein the union becomes a kind of independent “third party” in labor negotiations, more concerned with its own aggrandizement than with the interests of the workers it purports to represent.

Thus, in so far as unions can push wage rates above the level that would be set by the free market they may temporarily benefit a particular group of workers but at the cost, when times are bad, of widespread unemployment and displacement, as in the case of automobiles and steel. More seriously, present law pre vents workers from direct access to management and ]eaves dissidents in a kind of no man’s land. Collective bargaining as currently enforced is tantamount to the collectivization of labor.

What the authors of this book plead for is a much greater extension of freedom of contract where some workers would no doubt choose to join unions but others would prefer to deal with their bosses directly. It will be argued that this would produce chaos in labor relations. But just here it is well to remember that unions today constitute somewhat less than 20 per cent of the labor force, and a declining share at that. In the great majority of cases employers and employees manage to work out their differences without the help of government-sponsored unions.

The authors are also admirably clear on the point that workers should be allowed to withdraw their services when they find it to their interest to do so. But such voluntary withdrawal which amounts to resignation differs from the conditions that exist today when strikers are almost always sure of retaining their jobs, meanwhile drawing unemployment insurance and welfare payments at public expense. Moreover the aim of the present strike—a military term—is not just to withdraw labor but to close down the employer’s plant and, by violence or threat of violence on the picket line or elsewhere, to prevent others willing and able to work from working. Men have no right to do this and every state in the union has laws against such actions. The tragedy today is that these laws are rarely enforced. The over- regulation of labor in so many particulars has led to an all but total disregard for the common law.

Back in the seventeenth century Sir Henry Maine argued that the progress of civilization might be measured as a society passes from status to contract. With this exponential jump the West threw off the last vestiges of feudalism and serfdom and entered into an era of Liberty under Law. In the past fifty years governments have been rushing pell-mell to reverse such progress. Deregulating Labor Relations is a sustained plea for turning the clock forward again.

* Fisher Institute, 6350 LBJ Freeway, Suite 183E, Dallas 75240.