The War on Prices by Ryan A. Bourne

Author:Ryan A. Bourne [Bourne, Ryan A.]
Language: eng
Format: epub
ISBN: 9781952223877
Publisher: Cato Institute
Published: 2024-04-05T04:00:00+00:00

CHAPTER 16

Minimum Wages Are an Ineffective and Inefficient Anti-Poverty Tool

Joseph J. Sabia

Throughout the 19th and early 20th centuries, state and federal courts largely ruled that the right to freely contract one’s labor was protected under the Fourteenth Amendment to the U.S. Constitution and could only be limited on narrow grounds.1 Evolving theories of constitutional law later concluded that states could have a “compelling interest” in setting laws for maximum work hours (Muller v. Oregon (1908)) and minimum wages (West Coast Hotel Co. v. Parrish (1937)).2

Poverty reduction was deemed one such compelling interest. In West Coast Hotel Co. v. Parrish (1937), the U.S. Supreme Court upheld a minimum wage law in Washington State to “reduce the evils of the ‘sweating system,’ the exploiting of workers at wages so low as to be insufficient to meet the bare cost of living.”3 Since that landmark decision, poverty alleviation has remained at the heart of political arguments in support of minimum wages.

President Franklin D. Roosevelt introduced the first national minimum wage—$0.25 per hour—on October 24, 1938, as part of the Fair Labor Standards Act, to alleviate deprivation among the one-third of Americans that were “ill clad, ill-housed, and ill-nourished.”4 In later years, Presidents John F. Kennedy, Lyndon B. Johnson, Bill Clinton, and Barack Obama all reiterated the supposed link between minimum wages and poverty alleviation.5 In making the case for a $15 federal minimum wage in 2021, for example, President Joe Biden said: “No one should work 40 hours a week and live below the poverty wage. And if you’re making less than $15 an hour, you’re living below the poverty wage.”6

The potential poverty-reducing effects of minimum wages remain central to advocacy for increasing local, state, and federal minimum wage rates today. In 2021 and 2022, two bills were introduced in Congress to raise the federal minimum wage from $7.25 per hour to $15 per hour: the Living Wage Now Act and the Raise the Wage Act.7 In 2023, Sen. Bernie Sanders (I-VT) introduced new legislation to raise the federal minimum wage to $17 per hour.8 Proponents of these bills have regularly cited the Congressional Budget Office’s prediction that nearly 900,000 individuals would be lifted out of poverty if the legislation was passed.9

These claims raise three crucial policy questions:

• Does the most credible empirical evidence suggest that modern minimum wage increases have been effective in alleviating poverty?

• Do employer responses to these laws undermine their poverty-alleviating ambitions?

• Are there more effective, efficient, and better-targeted means of delivering income to the working poor than raising a mandated wage floor?

In this chapter, readers will find that the answers to these questions are no, yes, and yes.

Minimum Wages and Poverty in Theory

The effect of minimum wage increases on poverty is theoretically ambiguous. For instance, a government-mandated hourly wage floor could reduce poverty by raising the total wages paid to low-skilled workers living in poor families, thereby raising family incomes and lifting those workers and their families out of poverty.10

Moreover, in theory, if low-skilled labor markets are characterized

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