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Fighting Poverty with Mandated Wage Floors

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  1. Fighting Poverty with Mandated Wage Floors David Neumark

  2. 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

  3. 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)

  4. 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

  5. Overview of findings from 20+ years of research • 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

  6. 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

  7. Predictions of economic theory • 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

  8. Important exceptions • 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

  9. What does theory predict about distributional effects of wage floors? • Evidence of disemployment effects does not imply that wage floors are bad policy

  10. How do we estimateeffects 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

  11. How do we estimateeffects 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

  12. 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

  13. Summary measure of disemployment effect of minimum wage • 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%

  14. What about living wages? • 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

  15. Largely the same answer with regard to employment effects 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

  16. 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

  17. 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%

  18. 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

  19. How do minimum wages affect workers at or near the minimum? 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

  20. 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

  21. 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

  22. Many low-wage workersare in high-income families Distribution of low-wage workers (< 50% of average wage) Burkhauser and Sabia (2007)

  23. 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

  24. 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

  25. 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)

  26. 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)

  27. How can higher minimum wagesincrease 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)

  28. Living wages have more beneficial distributional effects 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

  29. 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

  30. 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

  31. EITC vs. wage floors – theory • 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

  32. EITC vs. wage floors – evidence • 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)

  33. Minimum wage-EITC interactions? • 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)

  34. Does a higher minimum wage make the EITC more effective? • 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

  35. 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

  36. Minimum wage effects unambiguously bad • 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

  37. Living wages offer more, but limited, promise • 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?

  38. EITC far more effective, for women with children • 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