Monday, October 02, 2006

Neumark on the Minimum Wage

A prominent critic of the minimum wage as an anti-poverty tool is David Neumark, an economics professor at UC Irvine and a graduate of the Harvard econ PhD program. Here is an excerpt from Neumark's latest summary (brief version) of the relevant research:

The central goal of raising the minimum wage is to raise incomes of low-income families and reduce poverty. There are three reasons why raising the minimum may not help to achieve this goal. First, a higher minimum wage may discourage employers from using the very low-wage, low-skill workers that minimum wages are intended to help. Second, a higher minimum wage may hurt poor and low-income families rather than help them, if the disemployment effects are concentrated among workers in low-income families. And third, a higher minimum wage may reduce training, schooling, and work experience—all of which are important sources of higher wages—and hence make it harder for workers to attain the higher-wage jobs that may be the best means to an acceptable level of family income.

The evidence from a large body of existing research suggests that minimum wage increases do more harm than good. Minimum wages reduce employment of young and less-skilled workers. Minimum wages deliver no net benefits to poor or low-income families, and if anything make them worse off, increasing poverty. Finally, there is some evidence that minimum wages have longer-run adverse effects, lowering the acquisition of skills and therefore lowering wages and earnings even beyond the age when individuals are most directly affected by a higher minimum....

Those interested in using economic policy levers to redistribute income to lower-income families should instead push for policy options that encourage work, that better target poor and low-income families, and that have a proven record of reducing poverty. The Earned Income Tax Credit, which is implemented at the federal level and supplemented by many states, appears to satisfy all of these criteria and thus is a better redistributive policy.

If you click on the link, you can also read Neumark's assessment of the famous Card-Krueger study, which is often cited by minimum-wage advocates.