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Fighting Poverty with Mandated Wage Floors David Neumark Outline Mandated wage floors and poverty reduction Employment effects Effects on low-wage workers: winners / losers Effects on poor and low-income families The EITC and the minimum wage Summary and conclusions

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Fighting poverty with mandated wage floors l.jpg

Fighting Poverty with Mandated Wage Floors

David Neumark


Outline l.jpg
Outline

  • Mandated wage floors and poverty reduction

  • Employment effects

  • Effects on low-wage workers: winners / losers

  • Effects on poor and low-income families

  • The EITC and the minimum wage

  • Summary and conclusions


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Minimum wages and living wages pitched as tools to fight poverty

  • “I intend to do all I can to see that the minimum wage is increased this year. No one who works for a living should have to live in poverty.” (Senator Edward Kennedy)

  • Minimum wages will “raise the living standards of 12 million Americans” (President Bill Clinton)

  • “The living wage is a crucial tool in the effort to end poverty” (Economic Policy Institute)

  • “[T]he basic premise of the living wage movement is simple: that anyone in this country who works for a living should not have to raise a family in poverty” (Pollin and Luce)


Distributional effects ambiguous wage floors create winners and losers l.jpg
Distributional effects ambiguous: wage floors create winners and losers

  • Gains occur for workers whose wages rise, who keep their jobs, and whose hours are not reduced

  • Losers include workers whose employment prospects worsen, or for whom hours declines more than offset wage increases

  • Distributional effects are complicated by disjunction between low-wage workers and low-income families


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Overview of findings from 20+ years of research and losers

  • Minimum wages and living wages cause employment declines among the less-skilled

  • Minimum wages may lead to more poor families; no evidence establishes that they reduce poverty

  • Living wages have more favorable distributional effects and may reduce poverty

  • EITC is superior policy

    • Combining EITC with minimum wage may have additional distributional benefits


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Outline and losers

  • Mandated wage floors and poverty reduction

  • Employment effects

  • Effects on low-wage workers: winners / losers

  • Effects on poor and low-income families

  • The EITC and the minimum wage

  • Summary and conclusions


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Predictions of economic theory and losers

  • Economists predict that when something becomes more expensive, agents use less of it

    • Gas

    • Cigarette taxes

  • In context of wage floors, “agents” are the owners of firms, deciding how much labor to employ

    • Just as consumers substitute away from goods that become more expensive, firms substitute away from inputs that become more expensive


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Important exceptions and losers

  • With skilled and unskilled labor, employment of unskilled will fall, but employment of skilled may rise

    • Overall effect almost surely negative, but could be small

  • If there is uncovered sector, employment may rise there; and if uncovered sector large, overall employment may not fall much

    • More relevant to living wage than to minimum wage


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What does theory predict about and losers distributional effects of wage floors?

  • Evidence of disemployment effects does not imply that wage floors are bad policy


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How do we estimate and losers effects of wage floors on employment? (I)

  • Earlier research on which long-standing consensus on minimum wages was based was problematic

    • Used changes in nationalminimum wage

    • Increases were infrequent

    • Increases associated with other changes, like business cycle


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How do we estimate and losers effects of wage floors on employment? (II)

  • Minimum wage research begun in 1990s exploits variation introduced by state minimum wages

    • Compared experiences in similar states with and without minimum wage increases

    • Standard method in empirical policy research

    • Also applied to research on living wages, at the city level


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Overwhelming evidence that minimum wages reduce employment of least-skilled

  • I authored a number of studies beginning in early 1990s

  • Recently reviewed over 100 studies for the U.S. and elsewhere since then (Neumark and Wascher, 2007)

    • Important exceptions, but 2/3 of studies show negative effects, and about 85% of the more reliable studies do

    • The more studies focus on the very least-skilled most affected by minimum wages, the stronger the evidence of disemployment effects


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Summary measure of disemployment effect of minimum wage of least-skilled

  • Some remaining dispute, but earlier consensus largely restored

    • Journal of Economic Literature survey: “best estimate” of minimum wage elasticity for young workers: − 0.1 to − 0.2

    • E.g., elasticity of − 0.2 implies that 10% increase in minimum reduces employment by 2%


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What about living wages? of least-skilled

  • Living wages differ from minimum wages in important ways

  • High wage floors

  • Narrow coverage

    • Contractors and subcontractors

    • Business/financial assistance recipients

    • City employees

  • Because of coverage and wage levels, much more concentrated on adults than teenagers, in contrast to minimum wages


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Largely the same answer with regard to employment effects of least-skilled

Effects on wages and employment rate in bottom 10th of wage/skill distribution:

100% increase in living wage

10

Contractor-only

Business assistance

5

0

% change

Wage effects

-5

-10

Adams and Neumark (2004)

-15

-20

Employment effects


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Outline of least-skilled

  • Mandated wage floors and poverty reduction

  • Employment effects

  • Effects on low-wage workers: winners / losers

  • Effects on poor and low-income families

  • The EITC and the minimum wage

  • Summary and conclusions


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Does “moderate” disemployment effect imply low-wage workers helped?

  • “Back-of-the-envelope” calculation

    • With elasticity of −0.2, and 10% increase in minimum

      • 2% lose their job

      • 98% get 10% raise

      • Average income of low-wage workers up by (.98 x 10) – (.02 x 100) = 7.8%


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But disemployment effect is worse for those actually affected by wage floor

Incorrect calculation

2% employment decline

10% minimum wage increase

10% employmentdecline

Correct calculation

10% minimum wage increase

80% above minimum

20% at minimum

Average

Wages

No change

Up 10%

Up 2%

Employment

No change

Down 10%

Down 2%

Earnings

No change

No change

No change


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How do minimum wages affect workers at or near the minimum? affected by wage floor

Estimated response to 10% increase in minimum wage

6

Wages

4

Hours

Employment

2

% change

Earnings

0

-2

Neumark, Schweitzer, and Wascher (2004)

-4

-6

At minimum wage

1.1 x minimum

1.5 - 2 x minimum

-8


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Outline affected by wage floor

  • Mandated wage floors and poverty reduction

  • Employment effects

  • Effects on low-wage workers: winners / losers

  • Effects on poor and low-income families

  • The EITC and the minimum wage

  • Summary and conclusions


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What do effects on low-wage workers imply for low-income families?

  • Low-wage workers and low-income families not synonymous

  • Low-wage workers over-represented in poor and low-income families, but many are in higher-income families

    • No one (Card and Krueger, EPI) disputes that minimum wages target poor families badly


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Many low-wage workers families?are in high-income families

Distribution of low-wage workers (< 50% of average wage)

Burkhauser and Sabia (2007)


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Estimating effects of minimum wages on income distribution (I)

  • Parallels other analyses, but with family as unit of observation

  • Strategy

    • Trace out entire income distribution by state and year

    • Compare changes in income distribution in states raising minimum wage to changes in other states


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Estimating effects of minimum wages on income distribution (II)

Year 1 income distribution (white) Year 2 income distribution (green)

Minimum wage increase

% families

1

Income / Needs

No minimum wage increase

% families

Income / Needs


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Higher minimum wage increases number of low-income / poor families (estimates)

Effect of average increase in sample period (1986-1995) ≈ 45 cents

Neumark, Schweitzer, and Wascher (2005)


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Higher minimum wage increases number of low-income / poor families (estimates)

1

0.8

0.6

0.4

Change in %

0.2

0

-0.2

-0.4

-0.6

0-1 (poor)

1-1.5(near-poor)

1.5-2

2-3

-0.8

Income / Needs

Neumark, Schweitzer, and Wascher (2005)


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How can higher minimum wages families (estimates)increase poverty?

  • Winners: Teens from affluent families?

  • Losers: Adult heads of poor, low-income households? Secondary earners in non-poor, low-income families (NSW, 2005)

  • Related results

    • Minimum wages result in redistribution of income among low-income families (NW, 2002), and redistribution of jobs among low-wage workers (NW, various)

      • Long-term minimum wage workershurt the most (Lang and Kahn, 1998)

  • Results consistent with other research (e.g., Wu et al., 2006)


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Living wages have more beneficial distributional effects families (estimates)

Change in likelihood that family falls below income threshold: 100% increase in living wage

0

-1

Percentage

point change

-2

-3

-4

-5

50% of

poverty line

Poverty

line

150 % of

poverty line

200% of

poverty line


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Results reveal the “good” and “bad” aspects of living wages

  • Living wages reduce poverty and help low-income families somewhat above the poverty line

  • Living wages do not increase the “depth” of poverty

  • But results also suggest that these laws do not help the poorest families

    • Not surprising, given lower employment rates, and that disemployment effects fall on least-skilled


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Outline living wages

  • Mandated wage floors and poverty reduction

  • Employment effects

  • Effects on low-wage workers: winners / losers

  • Effects on poor and low-income families

  • The EITC and the minimum wage

  • Summary and conclusions


Eitc vs wage floors theory l.jpg
EITC vs. wage floors – theory living wages

  • In theory, EITC seems more promising than wage floors

    • Raises income by encouraging work among less-skilled, especially female heads of household

    • Vs. minimum wage, which taxes hiring of less-skilled


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EITC vs. wage floors – evidence living wages

  • Unambiguous evidence that EITC increases labor force attachment and earnings of low-income families with children (e.g., Eissa and Liebman, 1996)

  • Large share of payments goes to poor families (Liebman, 1998; Scholz, 1994)

  • EITC outperforms minimum wage in terms of beneficial effects on distribution of family earnings/income (NW, 2001; Wu et al., 2006; Burkhauser et al., 1996)


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Minimum wage-EITC interactions? living wages

  • Labor supply response to EITC will reduce market wage, employment, incomes of low-skilled ineligibles (Leigh, 2007; Rothstein, 2007)

    • Can higher minimum wage offset these adverse effects?

    • Unlikely, because raising binding wage floor will simply strengthen disemployment effects

  • More plausible is that EITC may not be enough to draw single mothers into labor market, but combining EITC with minimum wage may do so

  • Combining two policies can enhance beneficial effects of EITC on poor families with children, but worsen outcomes for childless men (and teenagers)


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Does a higher minimum wage make the EITC more effective? living wages

  • NW (2009): EITC interacts with the minimum wage to amplify the labor supply response, increase in earnings, and reduction in poverty among single mothers

  • But combination of EITC and minimum wage has adverse effects on the employment and earnings of less-skilled and minority men, (especially without children in the home)

  • Benefits to single mothers come at a cost, with minimum wages exacerbating the potentially adverse effects of the EITC on this group


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Outline living wages

  • Mandated wage floors and poverty reduction

  • Employment effects

  • Effects on low-wage workers: winners / losers

  • Effects on poor and low-income families

  • The EITC and the minimum wage

  • Summary and conclusions


Minimum wage effects unambiguously bad l.jpg
Minimum wage effects unambiguously bad living wages

  • Minimum and living wages reduce employment of less-skilled workers, as theory predicts

  • Aggregate disemployment effects moderate, but low-wage workers, on net, hurt by minimum wages

  • Minimum wages increase poverty


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Living wages offer more, but limited, promise living wages

  • Living wages have more beneficial distributional effects, helping poor and lower-income families, but not the least well off

    • Can’t conclude that extending living wage more broadly would generate similar benefits

    • Greater breadth would make them more like minimum wages, with adverse distributional effects

    • Narrowly-targeted wage floors may sometimes work, but who should benefit?


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EITC far more effective, for women with children living wages

  • EITC is better way to fight poverty

    • But can harm low-skilled, childless men

  • Effects—in both directions—appear to be enhanced by higher minimum wage

    • Extending EITC to low-skilled, childless men would reduce benefits for poor female household heads

  • Not surprisingly, even the most effective redistributional policies present tradeoffs, and some are between different low-income individuals and families


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