Bernie Sanders Is Wrong—A Higher Minimum Wage Won’t Reduce Poverty

Senator Bernie Sanders (VT) is at it again. Last week the longtime minimum-wage advocate proposed raising the federal minimum wage from $7.25 to $17 per hour over the next five years. Sanders says a higher minimum wage will reduce poverty by increasing incomes for millions of workers, but a new study undermines his claim.

The link between poverty and the minimum wage seems simple: Mandate higher wages and workers will make more money, and more money means less poverty. But real life is not that simple. A business forced to pay a higher wage will look for savings elsewhere, and often this takes the form of hiring fewer workers or reducing workers’ hours. In their 2022 review of minimum wage studies, economists David Neumark and Peter Shirley conclude that a higher minimum wage reduces employment or hours, especially for teenagers and those with less education. These negative employment effects can exceed any positive wage effects and as a result increase poverty by reducing incomes on average.

Businesses can also increase prices in response to a higher minimum wage. Several studies find that minimum wage increases are passed through to customers via higher prices at grocery stores and other businesses impacted by minimum wage laws. Higher prices erode the purchasing power of a higher minimum wage which reduces its effectiveness as a tool for fighting poverty.

In their recent study, economists Richard Burkhauser, Drew McNichols, and Joseph Sabia use four decades of data to directly analyze the impact of state minimum wage increases on poverty. They analyze small minimum wage increases of less than $0.50 per year and larger increases of $1 per year and find no significant evidence to support the claim that a higher minimum wage reduces poverty. This implies that any positive wage effect is neutralized by a negative employment effect or higher prices.

They also find that a higher federal minimum wage would not target the working poor. Less than 10% of workers who would be impacted by a federal minimum wage increase live in a poor household. About two-thirds are part of families with incomes more than two times the poverty level and almost half are part of families with incomes three times the poverty level.

There is also little evidence that a higher minimum wage systematically improves other outcomes. In another recent paper, David Neumark reviews studies that examine the impact of the minimum wage on various health outcomes and health-related behaviors. In theory higher incomes can improve health outcomes, but the impact of the minimum wage is mixed.

Some studies find a higher minimum wage improves diet or reduces obesity, while others find a higher minimum wage increases smoking and reduces exercise. Higher minimum wages also seem to increase risky behavior such as drinking but reduce suicides. Regarding families, there is evidence that higher minimum wages cause mothers to spend more time with their children. However, higher minimum wages are also associated with declines in children’s test scores. So a mixed bag, to say the least.

Supporters of a higher minimum wage are right about one thing: Poverty is a problem, especially chronic poverty. We should strive to find ways to mitigate it. Unlike the minimum wage, tax credits like the Earned Income Tax Credit (EITC) increase employment, and working full-time is the best way to stay out of poverty.

The federal, state, and local governments should simplify their social safety net programs to further encourage work. A tangled web of local, state, and federal programs with different eligibility rules and benefits schedules is confusing and hard to use. Many programs foster dependency by phasing out benefits as fast as people earn additional money. In some cases, a modest increase in income can lead to a large drop in benefits, in effect creating a tax rate greater than 100%.

A single cash benefit that phases out as people earn more money would be easier for people to use and encourage work. Giving people cash would help them meet their immediate needs, while slowly phasing out the benefit would put them on the path towards self-sufficiency. A social safety net should be a bridge to the market economy, not become a way of life.

Supporters of a higher minimum wage may mean well, but there is little evidence that raising the minimum wage is an effective way to reduce poverty. There are better solutions out there we should focus on.