Minimum Wages: A Poor Way to Reduce Poverty

Abstract

In his 2014 State of the Union address, President Barack Obama endorsed a plan to raise the federal minimum wage from $7.25 to $10.10 per hour. Supporters of the increase argue that a $10.10 minimum wage is necessary to ensure that those who work hard and play by the rules do not live in poverty. While alleviating poverty is a widely shared goal, raising the minimum wage is a very inefficient means of achieving this objective and is likely to hurt many low-skilled workers.

Nobel Prize-winning economist Milton Friedman said, “one of the great mistakes is to judge policies and programs by their intentions rather than their results.” With regard to the minimum wage, the intentions and the results are usually different. This bulletin discusses the latest empirical evidence on the effects of minimum wage increases on poverty and employment. It also presents evidence on the likely effects of future minimum wage increases.

The bulletin concludes that minimum wage increases almost always fail to meet proponents’ policy objectives and often hurt precisely the vulnerable populations that advocates wish to help. The weight of the science suggests that policymakers should abandon higher minimum wages as an antiquated anti-poverty tool. Minimum wages deter employment and are poorly targeted to those in need.

Keywords: Mimimum Wage, Poverty, Adverse Employment Effects, target efficiency

JEL Classification: I3, I32, I38, P46