Reducing Poverty via Minimum Wages, Alternatives

Raising the minimum wage has become a popular proposal to combat rising inequality and persistent poverty in the United States. Proponents argue that this policy could restore some modicum of fairness to the U.S. labor market. Since the last federal minimum wage increase in 2009 to $7.25 per hour, 23 states have raised their minimums above the federal level, and several cities have set or are considering minimum wages as high as $15 an hour.

A higher minimum wage reduces the inequality of wages earned by workers (Neumark, Schweitzer, and Wascher 2004). However, the merits of using this tool to reduce poverty depend on the extent to which poor families benefit from the increased wages, other responses by employers, and whether alternative policies would be more effective. This Letter discusses evidence on the effectiveness of the minimum wage relative to and in combination with other policies, such as the earned income tax credit. It also touches on other broader issues relevant to antipoverty policies, in particular whether a higher minimum wage reduces dependence on other programs that benefit poor or low-income families.

Minimum wages and low family income A single working adult with two children earning the federal minimum wage of $7.25 and working fulltime earns about $14,500 a year, well below the U.S. poverty threshold of $19,073 for a family of this size. Numbers like these frequently underlie arguments to raise the minimum wage, citing either the hardship or the unfairness of a full-time worker earning “below poverty” wages. Clearly, an increase in the minimum wage has the potential to address this problem. 

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