Monthly Archives: February 2014

Progressives Beware: Don’t Make These Two Arguments Simultaneously

Recently making the rounds in the minimum wage debate is a working paper released late last December from UMass Amherst economist Arin Dube. With his new research, he argues that, in fact, the minimum wage really does reduce poverty, despite most previous studies having demonstrated no significant effect of minimum wage increases towards reducing poverty. According to Dube’s preferred methodology, for every 10 percent increase in the minimum wage, overall poverty is reduced by 2.4 percent (of the total who are in poverty, not percentage points in the poverty rate).

In my opinion, Dube’s two studies regarding the employment effects of the minimum wage have research design flaws, as were pointed out by Neumark, Salas, and Wascher in their review of said studies. Given this, I can’t help but be initially skeptical of Dube’s most recent (unpublished) paper about the antipoverty effects of the minimum wage.

As I’ve explained before, the minimum wage does not have the significant antipoverty effect that most minimum wage supporters usually assume it to have. This is due to several offsetting factors (mildly higher food prices, negative employment effects), as well as reasons that make the minimum wage poorly targeted in general (most impoverished adults don’t work; most minimum wage workers are not in poverty).

But given these factors, the results of a minimum wage increase on poverty do not need to be zero. Theoretically, the poverty effects are ambiguous. So Dube could be right that on the margin (and in the short run), the antipoverty effects of minimum wage increases tend to outweigh the propoverty effects.

However, there’s an important caveat. As Dube acknowledges in his concluding remarks:

There are a number of outstanding issues that I did not address in this paper. The first set of issues concerns the definition of family income used in this analysis. Following official poverty calculations, my family income definition includes both pre-tax earnings and cash transfers…the estimates here do not capture the impact of minimum wages on non-cash transfers such as food stamps or housing, or on the receipt of tax credits such as EITC.

As I pointed out in my recent video, one of the considerations with a minimum wage hike intended to reduce poverty is that a good portion of the wage increases will be offset by losses in government benefits. Often times, low-wage workers in poverty will be enrolled in one or more government welfare programs, as James Sherk detailed in his congressional testimony on the minimum wage. Because of this, they face high implicit marginal tax rates which offset a significant amount of the wage gains. As Unbiased America illustrates in this post, the effect is by no means negligible.

Why is this important? Well, it has to do with the fact that progressives like to make another argument with regards to the federal War on Poverty. As Joe Biden’s former chief economist Jared Bernstein writes:

The official [poverty] measure stands at 15 percent, but it is widely regarded to [be] woefully inadequate, as it depends on outdated income thresholds and omits both much of the impact of policies intended to fight poverty and income sources of low-income households.

Like many other progressives as of late, Bernstein argues that despite the stagnation in the official poverty rate, the federal War on Poverty has actually been successful when looking at the supplemental poverty rate, which takes into account various government transfers and in-kind benefits, most of which are part and parcel of the War on Poverty itself.

Those of you reading closely will recognize a contradiction between these two positions. On the one hand, some progressives argue that the minimum wage reduces poverty, vis-à-vis Dube’s paper. But many progressives also argue that the War on Poverty really has had some success, because post-tax-and-transfer poverty has declined.

Yet by his own admission, Dube’s widely cited minimum wage research only accounts for the official poverty rate, not the supplemental poverty rate. To be fair, this is the case with other minimum wage poverty studies as well. Nevertheless, Dube’s paper is befallen by the very shortcoming that many progressives go out of their way to avoid with respect to the War on Poverty.

Because of this, one thing ought to be clear. Progressives can argue that the minimum wage reduces poverty, but that the War on Poverty has failed to reduce it. Alternatively, progressives can argue that the War on Poverty did indeed reduce poverty, but that the minimum wage has not been shown to do the same. To be sure, one could find reason to doubt either of these claims. But if anything is certain, it’s that progressives cannot make them both simultaneously.