A year ago, I brought attention to a Canadian Public Policy article on poverty and the minimum wage in Ontario. A notable finding of the study was that the overlap between those who earn minimum wage and those who are in poverty was surprisingly small, small enough to conclude – as I did – that "increasing the minimum wage is only slightly more effective as an anti-poverty measure as would be distributing money at random across households." A few months later, I came across a study that found much the same results in the United States.
I knew that policy analysts in the Quebec government were working on a similar project and had heard that they had found similar results. That study has finally been made public, and is one of a set of articles on the minimum wage. Even better, it would seem that Pierre Fortin has fleshed out and put into digital form the literature survey I blogged about over here (has it really been four years?!?).
But it's this article by Jean-François Mercier and Martine Poulin that has the numbers I'm going to talk about below. A very nice feature of the study is that it pays particular attention to those earning just above minimum wage.
Here is a table of some numbers taken from Tables 2 and 4 of their paper:
| Low-income families | Families above low-income threshold |
All families | |
|---|---|---|---|
| Total | 448 700 (13.1%) | 2 979 100 (86.9%) | 3 427 800 (100%) |
| In employment | 193 900 (8.4%) | 2 105 300 (91.6%) | 2 299 200 (100%) |
| Minimum wage or less |
27 900 (13.5%) | 178 200 (86.5%) | 206 100 (100%) |
| $7.61/hr – $8.99/hr | 44 200 (18.2%) | 199 100 (81.8%) | 243 300 (100%) |
| $9.00/hr – $9.99/hr | 34 100 (17.3%) | 163 400 (82.7%) | 197 600 (100%) |
| Less than $10/hr | 106 200 (16.4%) | 540 700 (83.6%) | 646 900 (100%) |
As was the case in Ontario, the proportion of minimum-wage earners in poverty (13.5%) is only slightly greater than the proportion of those in the general population who are in poverty (13.1%).
It is at this point that someone invariably claims that those in poverty are clustered just above the minimum wage, and that these people are the real targets of the measure. Well, not so much, it turns out. The incidence of poverty in this group is higher than in the general population, but it never goes above 20%. Given this weak relationship, it's hardly surprising that their policy simulation exercise found that increasing the minimum wage had only marginal effects on inequality.
Moreover – as the authors note – this marginal effect is the best-case scenario, because it is based on the assumption that increasing the minimum wage has no effect on employment. Although the effects on employment are likely to be small, they won't be zero, and – as Pierre Fortin notes in his literature survey – estimates from Canada are generally larger than in the US. A study prepared by some of my colleagues for the Quebec government puts it this way (my translation):
An increase in the minimum wage can induce firms to reduce employment in the medium to long term. The literature from Canada is unequivocal on this point. Studies by Gunderson 92005), Baker, Benjamin and Stanger (1999), Benjamin (1996), Sussman and Tabi (2004) and Statistics Canada (2005) show that workers who are most vulnerable to these effects are those with the lowest levels of education, who have been in the labour market for the shortest period of time, and who have the least seniority at their workplaces.
Studies focussing specifically on social assistance in Quebec also show that laboour market integration is more difficult at high levels of the minimum wage (Duclos et al (1996), Duclos et al (1999), Fortin et al (1999), Fortin et al (2002), Lacroix (2000)). For example, Côté (2006) finds that regardless of the type of household, increasing the minimum wage has the effect of increasing the duration of spells on social assistance. In fact, the only groups that are not negatively affected are single men over 45 and single women under 25. The increased difficulty in finding employment and leaving social assistance is likely due, ceterus paribus, to reduced labour demand on the part of firms.
You can check out the references in the original report. You will note that the minimum wage file is tangential to its main focus, which I'll be revisiting in the near future.
The employment effects of the minimum wage might be safely ignored if the gains from doing so – in terms of reduced poverty and inequality – were "large enough". But available evidence makes it clear that these gains are far too small to justify ignoring employment effects. Moreover, the data suggest that marginalised workers are most likely to pay the price of those job losses.
I've said it before, and I'll say it again: as anti-poverty measures go, increasing the minimum wage is pointless at best.
Worthwhile Canadian Initiative 
“will be extraordinarily effective in reducing poverty among those whose last names have a number of letters that is evenly divisible by 3.”
Says the guy with 6 letters in his last name. Don’t think we didn’t notice!
“We both support higher income transfers to the poor. It does not follow that we should reject every complementary policy other than direct cash payments based on household income.”
The point being, though, that the data suggests that it, in fact, is not a ‘complementary’ policy at all.
” It does not follow that we should reject every complementary policy other than direct cash payments based on household income.”
But Erin, and really virtually everyone not an economist commenting here, the point is that it’s been studied closely and rigourously and the fact is that for the purpose of reducing poverty raising the minimum wage is not effective. That is all that’s being said here.
If you have other reasons to favour a high minimum wage then that’s fine but it is NOT, in any sense, a complimentary policy to giving poor people some money.
Erin, I support increasing the minimum wage with the same level of enthusiasm I have for the policy of giving money to those whose last names have a number of letters that is evenly divisible by 3. I presume you do the same, only at a higher level of enthusiasm. I now look forward to a CCPA report advocating payments to those whose last names have a number of letters that is evenly divisible by 3.
Mike: Yeah – I was going to go with having red hair at first (everyone in my family has red hair), but that’s not a purely random trait in the population.
Serious question: How do we feel about giving cash transfers to short people? Given the data we have on job market outcomes, this benefit should disproportionately help the poor. More so than the minimum wage.
That is a really, really great question Mike.
Stephen Gordon,
your last name is evenly divisible by 3, but you earn much more than the minimum wage (I believe). So surely you are MORE enthusiastic for the policy of giving money to those whose last name have a number of letters that is evenly divisible by 3. At least if you a member of homo economicus.
Thanks Adam. I’d like to point out that being 6’3-6’4″, the question isn’t based on personal interest. 🙂
reason:”Don’t tell me you aren’t guided by standards, but always try to screw out the lowest rate possible (even though you could afford to pay more)!”
No, I wouldn’t squeeze a desperate job seeker. But, I’m embarrassed to say that the wages I pay, are likely to be both standard and equilibrium wages. They may even be below an efficient equilibrium if search costs do play a role in setting the standard. But I don’t think search costs are significant. Most searchers (that I have seen) are not desperate and already have a job.
Also, thanks for seconding the motion for “citizen’s dividend”. Both words are important: citizens, not tax payers/workers; dividend, not negative tax or income guarantee. In a world where labour capital is going to be increasingly and inevitably marginalized by automation, it is critical that we begin to recognize that in addition to fruits of their own labour, the humans also have claims on land capital and monopoly rents (rather on the fruits of other peoples labour). Otherwise the final condition will be a state in which human input (labour and management) is gone as a form of capital in production and all wealth will flow to those who happen to be the owners of land at that point in time.
Stephen: “From this, we can conclude that earning minimum wage and being in poverty are essentially independent events.”
Is that because the earning the minimum wage puts someone just around the threshold of poverty? If the minimum wage were $50 then the correlation would be negative. If it were $5 it would be positive. Either way, the correlation doesn’t have any implication on whether minimum wage is good anti-poverty policy (I actually can’t see how it means much of anything). Not unless you think that setting a $50 minimum wage is good anti-poverty policy. But it also doesn’t mean that raising the minimum wage won’t help poor people. As I said above, you need to look at everyone who is affected by the minimum wage, not just those who are currently earning it.
Erin: Why do you want complementary policies? If one is clearly dominant for helping poor people, then use that one. Nobody has identified any way in which minimum wage is superior policy. It has real costs. They are borne by the unemployed (really poor) and the employers of low income labour. Why should everyone else be off the hook?
I meant “rather than on the fruits of other peoples labour”
Mike: “… cash transfer to short people. Given the data we have on job market outcomes, this benefit should disproportionately help the poor”
How about a tax on attractive people to fund a transfer to ugly people? The data would seem to suggest this too would help the poor. Would people then prefer to pay higher taxes?
I don’t know about that, but it’s where we learn about the political principle that labour should have a greater share in the fruits of production than rentiers.
“How about a tax on attractive people to fund a transfer to ugly people?”
But I already pay too many taxes as is!
In all seriousness, it’s harder to measure someone’s attractiveness than their height. But you’re correct RE: the data.
We can solve both of your advantages with a head tax.
Mandos:”I don’t know about that, but it’s where we learn about the political principle that labour should have a greater share in the fruits of production than rentiers.”
No, you really don’t know. The obsession with labour is infuriating. What is it with you people (the left) and your hatred for poor people. You want to help people who labour for the rentiers, but for those whose productivity is below your arbitrary minimum wage threshold, all you provide is welfare traps. What you don’t get is that labour productivity is being usurped by machines and systems. Some people are economically useless at $10/hour and with relentless technological progress that will sooner or later extend to everyone including you.
But what about the lazy, the stupid and the unlucky? They aren’t any more intrinsically at fault for their deficiencies than the short and the ugly.
More seriously…
K:”Either way, the correlation doesn’t have any implication on whether minimum wage is good anti-poverty policy”
Yes I’m quoting myself. That’s because I’m making a retraction. The lack of correlation means that the minimum wage is so high, that if it were any higher, then being at the minimum wage would have a negative correlation with being poor. That is indeed totally awful anti-poverty policy.
I guess I’m pretty middle of the road on the minimum wage. To me, the relevant question is whether the poorest people (noticeably) affected by an increase in the minimum wage are made better or worse off by it. Efficiency is irrelevant to me in this situation.
Blik: “Efficiency is irrelevant to me in this situation.”
Why? If you can get more help to poor people at a lower cost, how does that not matter to you?
And the poorest people are definitely not made better off by it. What it does is put a job even further out of reach for those with the lowest skills.
@K nit pick: low marginal product is not always the same as low skill. Especially in your slightly dystopian future ruled by robots.
Why is efficiency irrelevant to me? It’s all about opportunity cost.
When there are policy debates about the minimum wage, the question is whether to raise it or leave it the same. Those are the choices. There are no other options on the table. There is no more efficient method to choose because no other option is politically viable.
Blik: This is not parliament. It is a public forum where you get to tell people how you think the economy works and how things could be improved. Positive change is a result of long campaigns of intelligent public advocacy. Don’t be defeatist!
Patrick: Yes, “skill” is indeed a short hand for innate ability, education, industriousness and apparently also height and beauty. God knows which of those will be the best defense against the robots. As far as the future dystopia goes, to some extent we are already living it. People have long been predicting a utopian future of shortening work weeks and increasing leisure. But it hasn’t happened, and as long as people continue to derive their only revenues from their diminishingly productive labour, it isn’t going to happen. They’ll just be working harder and harder for less and less. The most depressing thing is that the left and the right are actually colluding to keep it that way. The obvious solution is the citizen’s dividend.
First of all, I’m an American (not that there’s anything wrong either way). That alone could explain some degree of defeatism on this issue. I don’t think I’m necessarily being defeatist, though. Perhaps I didn’t explain my position well. I didn’t mean to say that I’m resigned to never having any policy options other than the minimum wage or that I’m not enthusiastic about the possibility of better policies. I would gladly support more efficient ways of fighting poverty and I would gladly spread the message about them if and when I thought that doing so would have a positive (or even neutral) expected benefit. What I was saying is just that I don’t see any of that as having any significant effect on the debate over the minimum wage as it exists among politicians. On this site, we can compare various any policy options. I’m happy to do it. That’s why I’m here. However, the debate in the mainstream media and among politicians has its own (unfortunate) dynamics. When legislators debate raising the minimum wage, I don’t think it’s helpful to throw in comments about direct transfers. In those circumstances, I think we would be wasting our breath. I think the optimal action is to address the narrow question at hand. That’s all I’m saying.
Remember though, we do have direct transfers to the poor. Welfare. You could think of welfare as a basic income/negative income tax system. It’s just not a very good one. (For starters, it has very high net marginal tax rates.)
If a hypothetical government could redistribute only a finite amount, increasing income transfers to the poor would reduce poverty more than raising the minimum wage. This conclusion seems obvious without any data or literature reviews.
However, that is not the constraint on government policy. A far more likely constraint is that governments are unwilling to spend more in general or on welfare-type programs in particular. Meanwhile, they can raise the minimum wage through regulation at no fiscal cost.
We need to make the case for more and better income transfers to the poor. But outside of the budgetary process, we can and should also support a higher minimum wage. At least, I do not see how arguing against minimum wages advances an anti-poverty agenda.
Erin: Raising the minimum wage from here will benefit people who are less likely than the average Canadian to be poor. And the people you are distributing from are the very poorest and those who employ the poor. And everyone else is being let off the hook. And by doing so you will reduce productivity which will harm the fiscal balance. Why don’t you find a fairer, more efficient tax and distribute the receipts? It’s not minimum wage or nothing. There are alternatives which likely dominate the minimum wage in every possible way.
“However, that is not the constraint on government policy.”
I’m really curious about what the real constraints on government policy actually are, at least in the short term, in any jurisdiction. I wonder if anyone has ever put in a competent effort to figure it out (for any particular time and place). It seems pretty clear that they would depend mostly on political culture which would vary to some degree constantly, so it would be pretty much impossible to peg them down to any detailed degree. At the same time, we might see some useful basic patterns emerge. In any case, I think it would be interesting.
“I do not see how arguing against minimum wages advances an anti-poverty agenda.”
My Principles professor seemed to think it did. I’m on the fence about it. I can’t recall if Mankiw actually makes an argument one way or another in his textbook (yes, I belong to the Mankiw Generation).
Nick Rowe
“It’s just not a very good one. (For starters, it has very high net marginal tax rates.)”
It also has high administrative costs.
One thing you’re missing here is that raising the minimum often helps those who are making slightly more than the minimum wage.
Here’s how that works:
Most people making min. are in retail, hospitality, or foodservice.
Those making a bit more than min. are often working in the same businesses, alongside the min. earners. e.g. the fry cook makes a bit more than the dishwasher, the senior cashier makes a bit more than the junior.
When the min. gets upped, those making a little bit more, who have a bit more responsibility, naturally ask for a raise, too, since why should they have more work or responsibility with no difference in pay?
I saw this process unfold several times during my stint at a highwayside restaurant in BC during the late 80’s/early 90’s.
So there’s no question that a higher min. can help the poor.
It’s not a solution for our society’s severe distributional problem, mind you. That would take a much more aggressive socialist programme to repair. But our capitalism is still too immature for that. Class divisions are noticeable now, but political class consciousness still lags.