Helping The Poor By Hurting Them

It appears that a $15 minimum wage will become law in California. Almost invariably, the rationale offered by proponents includes the assertion that it will help “the poor.” But, as labor economist Mark Wilson put it, “evidence from a large number of academic studies suggests that minimum wage increases don’t reduce poverty levels.

Beyond the host of logical and empirical issues involved in deciding whether a minimum wage bump will provide more income to “the poor” as a group, there is another ethical issue that never seems to get discussed. Even if low-income households did gain current income as a group in statistical studies, only individuals bear actual benefits or costs, and such wage mandates redistribute wealth away from many low-income individuals in the name of helping “the poor.” As a consequence, much of the desired help for the poor will actually come from others who are poor.

How can a requirement to pay low-skilled workers more harm low-income individuals? Some lose jobs. Others lose work hours. Further, for those who keep their jobs and hours, on-the-job training and fringe benefits will fall, and required effort will rise, to offset hiked wages. And higher current wages are often less valuable than what is given up, particularly on-the-job training that enables people to learn, and therefore earn, their way out of poverty. That is why labor force participation rates fall and quit rates rise when the minimum wage rises (an effect that will be heightened by the large magnitude of the current proposed hike), which is the opposite of what would happen if all workers who kept their jobs benefitted from higher mandated wages.Higher minimum wages will not only disadvantage the least skilled compared to automation and outsourcing possibilities, their increased cost will also force them to compete with more skilled labor. That explains why unions are the biggest backers of such measures — their members will gain from an increased demand for their services regardless of whether the poor gain or lose. But those with more limited skills will suffer from the undermining of their one big competitive advantage — a lower price. And those with the fewest skills, least education, and job experience will face the greatest employment losses now, as well as having rungs to advancement removed from their potential career ladders. These effects will be further magnified by the fact that employers pay far more than the minimum wage to those workers, through added costs for the employer half of Social Security and Medicare taxes, unemployment insurance taxes, worker’s compensation premiums, etc.

With a higher minimum wage, some of those low-income workers lucky enough to already have job experience and a work history will keep their jobs. Many others will simply find themselves to be unemployable. The main consequence will not be that the poor gain, but that some low-income households benefit at the expense of other low-income households.

Minimum wage hikes thus illustrate a very serious, though all-but-ignored issue. Even if poor people in the aggregate end up with higher incomes (a position far from established), it only means that one subset’s increased earnings will be at least somewhat greater that another likely to be even poorer subset’s decreased earnings, greatly harming many of them. And such government-imposed harm cannot be justified by the intent to help the poor.

Gary M. Galles is a professor of economics at Pepperdine University and research fellow with the Independent Institute. His books include Lines of Liberty (2016), Faulty Premises, Faulty Policies (2014), and Apostle of Peace (2013).