Faculty Research Spotlight

David Neumark: Minimum Wages - Research and Policy

The rate of poverty and the degree of income inequality in the United States are both very high, and policymakers struggle with the design of policies to reduce poverty and increase economic resources of low-income families.

One of the most popular policies to try to increase living standards of the poor is the minimum wage, which mandates a wage floor below which wages cannot fall. The idea behind the minimum wage is simple and appealing: If we force up the wages paid to low-wage workers, then low-wage workers will earn more income, and the low-income families in which low-wage workers live will be better off.

However, economists have long pointed out – as they are wont to do – that things aren’t so simple. One of the most basic concepts that economists use to describe labor markets is the labor demand curve, which determines how many workers will be hired at any wage. When the government forces up the wage by imposing a minimum wage, employers respond by hiring fewer workers – in much the same way that we economize on gasoline when the price rises at the pump, or buy fewer tomatoes when they become more expensive in the winter. This prediction is confirmed by empirical research. In particular, scores of studies estimate the employment effects of minimum wages, using data from the United States and many other countries. The bulk of the evidence clearly shows that minimum wages reduce employment of the young, low-skilled people whose wages are most affected by the policy.

Thus, the minimum wage does not simply result in increased incomes for low-wage workers. Rather, like almost every public policy, the minimum wage presents a tradeoff. In this case, some workers keep their jobs and earn a higher wage – and they are surely better off. But others lose their jobs or have greater difficulty finding new jobs, and they are worse off.

Although the benefits of minimum wages are less clear-cut than might first seem the case, it is also too simplistic to dismiss the minimum wage as a response to poverty on the grounds that it causes job loss. Think about it. If we ruled out any policy that cost a worker somewhere a job, then we would have to avoid most environmental regulations, workplace safety rules, and mandates that employers provide health insurance or regulations of the insurance they purchase for their workers. Instead, policymakers have to weigh the costs and benefits of a policy, and ask whether the benefits outweigh the costs.

With respect to minimum wages, the question is whether the job loss that ensues for some is more than offset by the increases in income for others. The answer to a question like this is never decisive, since it requires comparing the benefits some people receive to the costs borne by others. However, policymakers might adopt a simple criterion such as “Does the minimum wage reduce poverty?”

Although many people believe that the answer to this question is “yes,” the evidence is discouraging. There is, in fact, no research supporting the claim that minimum wages reduce the proportion of families living in poverty, and in fact some research indicates that minimum wages increase poverty. How can this be? The answer comes from careful examination of the data. In particular, the relationship between being a low-wage worker and living in a poor family is remarkably weak, because many low-wage teenagers and young adults are in higher-income families, and many poor families have no workers. In recent data, 34 percent of minimum wage workers were in families with incomes exceeding three times the poverty line (roughly the top half of the income distribution), while only 17 percent were in poor families. Thus, the benefits of the minimum wage are not necessarily bestowed on low-income families, and indeed the evidence suggests the opposite – that if anything job-destroying effects of minimum wages fall particularly hard on low-skill adults in poor families.

This discussion of the minimum wage illustrates the many facets of public policy research and public policy decisions. A problem (in this case, poverty) is identified. A policy (the minimum wage) is proposed to address it. Thinking about the context in which the policy operates – in this case from the perspective of economics, but in other cases from the perspective of other, or many, disciplines – reveals potential complications because the policy itself affects behavior, and those behavioral changes may undermine the original goal of the policy. This inquiry typically identifies a more complex reality in which the policy may achieve some goals, but at some cost. At this point, the role of the researcher fades and the role of the policymaker comes to the fore. While the researcher may be adept at thinking through the effects of the policy, and identifying costs and benefits, the policymaker has to weigh the costs and benefits, and make difficult choices about who will benefit and who will bear the cost. Sometimes this decision is not so difficult, as when research indicates that the intended beneficiaries either are not helped or will suffer; I view the evidence on the minimum wage as consistent with this case. More commonly, though, a policy does deliver some of its intended benefits, but at a cost to others. In the latter case, the policy decision is extraordinarily difficult. Nonetheless, more-informed debate and better decisions can ensue when research accurately identifies the effects of the policy and tradeoffs it poses. In my research on minimum wages, and on policies ranging from affirmative action to the Earned Income Tax Credit to enterprise zones, my goal is to provide evidence that best informs policy debate and policy decisions.

David Neumark is Professor of Economics at the University of California, Irvine, Director of Graduate Studies in the Department of Economics, and Founding Director of the Center for Economics and Public Policy – to be launched concurrently with the Master’s in Public Policy program at UCI. In addition, Professor Neumark is a Bren Fellow at the Public Policy Institute of California. His research on minimum wages is described in Minimum Wages (MIT Press, 2008, co-authored with William Wascher).