Minimum Wage Policy and Poverty

- The minimum wage does not in any way directly target family income, right? We might not like poverty. We might wanna pass a law that says, you know, there should be less poverty, however, we're gonna do that. Turns out the minimum wage does that in a very scattershot way. Well, I'm really happy to be here. I was worried about it kind of being sleepy time at three in the afternoon, but you all got snacks and some of you probably have coffee in your water bottles, even though I'm told you're not supposed to. So you should be good. So yes, Josh introduced a topic I'm gonna talk about using minimum wage is to fight inequality and poverty. So I'm gonna try to talk for 40 minutes, I'll take my watch off to make it more likely that that's what I actually do and that I'll take questions and I'm happy to stick around a little afterwards, although I think you've already some other session and I will be at dinner tonight. So feel free to tap me on the shoulder. I'm gonna give you a few questions here. I was gonna sort of have discussion now, but they told me they gotta move microphones around and all, so we won't do that. But lemme just ask you these three questions. Think about 'em, we're gonna talk about 'em and we can come back to them later. Just a little bit of detail, just the facts. Oops, something's about to fall off here. Sorry. How high is the minimum wage? I'll tell you that that's not as, that's not that interesting. You know, do, do you think we should or should not have a higher minimum wage? People have very strong views about this. That's always the easy question. The second question is, why or why not? When I'm teaching my undergrads, I always say, do, what do you think the answer is? And you know, they say something and then I always follow up with why, which is the part they hate. And some of them will learn to not answer questions, but some of them accept the challenge. But really I'm gonna focus on the evidence. This is not a, you know, free markets always work. Minimum wage is it's theoretically a lousy idea. This is really gonna be talking about the evidence. That's the way I approach economics and that's the way I approach this topic. And I'll tell you why in fact, there aren't really a little bit and why there aren't really theoretical predispositions. We should hold very strongly here and like perhaps in everything we need to actually look at the data. Okay? So just a few facts on the minimum wage. The minimum wage at the federal level is $7 and 25 cents, which sounds low and probably is compared to most places. In fact, it seems low compared to most places because the vast, the majority of states now have minimum wages that are a lot higher. That's a new development. If you went back to late eighties and earlier, there was essentially only a federal minimum wage. Some really tiny exceptions. Connecticut had a minimum wage set by its constitution to half a percent above the federal minimum wage. So essentially relevant. But now for a lot of reasons, there's a lot more variation over 30 states, if I include DC I think that's right, have minimum wages above the federal and they go quite high. $16, $17. There are cities, it it, it started originally with Santa Fe and San Francisco. Maybe the fact those cities, high minimum wages doesn't surprise you. But now a lot of other places, not just in California, not even just in liberal states necessarily have high city minimum wages. So the federal minimum wage now is in, it's not irrelevant, but it provides a floor in an increasingly small set of states. And lemme give you a few just graphics to show you that first of all, this is simply how much higher the minimum wage is. These are states, not cities, too many cities relative to the federal. And I dunno if you can read, it's a pretty big screen. So maybe you can even in the back row. Many states are, are more than a hundred percent above the federal minimum wage. Now that's the 16 and 15 and 16 and $17 minimum wages. And so that's, that's sort of the, the the where we're starting. Now, this is new. I mean if, if you go back to probably 2015, 2016 presidential campaign, we had a number of state minimum wage increases. They were typically 50 cents a dollar, a dollar and a quarter in the 2016 campaign was I think the first time most of us at least heard the phrase, some of you may not remember you were young. I know fight for 15, which we still hear. That was the first time people started talking about going significantly higher. Now 15 seems cheap. Momani is talking about $30. LA is talking about, I think for hotels in some areas $25. Who knows? So, so that's sort of where we are now. But that's sort of an, a new development. So lemme now that's just facts you should have, you know, at your fingertips. But now lemme talk about why I think we have this policy change, why we have a lot of debate about it, why policy makers have, have gone down this road. And I think, I think this is essentially two explanations. One is, but I'm gonna kind of give you a little more nuance that maybe there aren't great explanations. But I think these are the explanations. One is there is rising inequality, there's debate about how much and how to measure it. It's a very complicated question, but it's gone up. So this figure shows you the height of these lines is, let's take the orange ones that, well actually the blue one that's more relevant says 50 to 20 ratio. So that's the median over the 20th percentile, right? The median is half above, half below. You probably know what those are. That 20th percentile is 80% above 20% below. So that blue line rising, the spike is a, is a, is a COVID thing. So I don't pay too much attention to that. But the blue line rising says the median is sort of pulling away from the bottom. Okay? So that's the kind of inequality increase that might prompt some people to say, well maybe you should raise the minimum wage, right? Maybe we should try to kind of reverse that a bit. But the other thing to notice here is the orange line, which is the 90 to 50 ratio. And you notice it's rising pretty much the same way. Little, it's a little less noisy. 'cause low skilled people are more selling to the business cycle. You can kind of see that with the gray bars, but they're both rising. And of course the minimum wage doesn't do anything about the top pulling away from the middle, right? 'cause it only affects people near the bottom. Although if we go to $30, that story will no longer be true. But I'll put that aside for now. So that's one reason I wanna point out though this, this is, this is earnings inequality. So we have precise terms here. Earnings means how much you earn during the year. So it's sort of your wage times, your hours or times your hours, times your weeks, depending on how you're measuring hours. So it's how much you earn over the year. It turns out this is a little harder to see, but I think I, and I don't have a a a, a laser, but you could sort of see it here. What I'm showing you here is what's happened to kind of the, the bottom of the distribution. But I'm breaking it out. And you can see the black line is wages, the orange line is weak work. And the blue lines is, is the share of people that work. Sorry, I got that wrong. The blue line is, sorry, black line is wages, orange is how much you work. And then, and then the blue line is earnings. And what you can see there is that the blue line earnings, which is in a sense to ultimately care about how much resources did people have, it's kind of following how much people are working more than, I mean wages, you can see a little bit of that. But a lot of this ink, the point is a lot of this erosion of earnings at the bottom of the earnings or the wage distribution is working less, not wages being lower. Okay? I'm not, wages is part of it. You can see that there. And that's very important because the minimum wage, if you're not working, doesn't do much of anything obviously. And it may lead to more people not working. We'll get to that in a minute. But even putting that aside, what this says is the problem of low income, at least part of the problem of rising inequality, part of the problem of families being poor, having low earnings is, is an erosion of work. And if you look, for example, I don't have a slide on this, but if you look at kind of lower skilled people, especially men more than women, interestingly enough, employment rates have kind of been on a steady, downward, downward path. So there's something else going on. Doesn't mean the minimum wages irrelevant, but it's definitely not the whole story or the whole, the whole definitely not the whole solution. Another way to make this point about that the minimum wage is, is, is, is certainly not the whole response and maybe not much of a response to the inequality problem. This is essentially how inequality has changed at different parts of the income distribution. So across the bottom there it says income percentile. So five is the fifth percentile, really low income. Up at top is really high income. This is from the famous work by pikes. It's somewhat contested. But what they claim and I think is partly true, no matter how you read the sort of contested evidence, maybe they overstated it, is that the most pronounced thing that has happened is way, way, way at the top. The very, very rich pulling away from the ones who thought they were quite that who, who wish they were quite that rich, right? And clearly, yeah, that we may not like that as a society. There might be reasons to counter this perfectly legitimate point of view. Minimum wage is not gonna have anything to do with that, right? This has to do with tax rates, the nature of executive pay, inheritance, taxes, you know, all that kind of stuff. Which has nothing to do with minimum wages. Okay? So that's sort of on the wage and earning side and that's the focus on workers. And I wanna draw this distinction here. So now I wanna switch to the focus on families. So lemme put up this chart and then, and then say what I mean, so what, what does the chart show? First of all, the chart shows the orange line is per capita, GDP, right? How much economic output is there per person? And of course that's going up over time. There's recessions and of course that's why we're richer now than we were 80 years ago because per capita, GGDP is a lot higher. The yellow line is the poverty rate, I'll talk about that as in a minute. But what you can see is there's some ups and downs, but it's been really stable for a long time. So the fact that, you know, if you look at GDP per capita, we say, hey, we're getting richer and richer and richer. Product rate is higher, pay is higher, output is higher. But we still have kind of the same proportion of families. Families at poverty might tell you might say, Hey, there's something going on at the bottom of the income distribution that this GDP growth isn't fixing and maybe we need to fix it. And maybe the minimum wage is to, is the way to fix that. Lemme say a little about, so I I two points here. First of all, what is the poverty rate? It's a weird concept in the US it's this thing that was created in the sixties and it's actually three times the average food budget of a low income family, which is a weird definition, but it's kind of stuck. There's alternative definitions. But this is when you hear reporting on the poverty rate, this is the number you hear. And it came from estimates that low income families needed roughly three times their food budget to sort of get by. That's where it came from. But note, that's an absolute number, not a relative number. We don't say you're poor if you're in the bottom 20% of the income distribution. It's actually an absolute amount. So we could have nobody poor, right? If it's, if it's everyone below 20%, then obviously 20% are always poor, right? We could have zero poverty in this country. I'm not saying we ever will because everyone could have income above three times the food basket, right? The fact that poverty is relatively, it stuck may not be quite the right word, but, but not, not declining quickly, at least when it's an absolute measure is in a sense even more discouraging, right? Because we actually, you know, you might think economic growth would get more and more and more people outta poverty. And what this says, of course this is, this is part of the inequality problem that the games aren't being as widely shared at the bottom. And that's true. The earlier slide said it's not all because of wages, it's for other reasons, but it's still true. Now, the important distinction I wanna make here, and I won't come back to this till, I dunno, probably 80% of the way through this is I switched without telling you from wages and earnings to poverty. Why is that important? Wages and earnings are an individual measure, right? An individual has a wage, of course, an individual works so many hours. If we talk about earnings, product of wage and how much you work, that's the individual's earnings. Poverty is a family concept that's defined at the family level. The, the important reason to keep that in mind for the purpose of this lecture is the minimum wage does not in any way directly target family income, right? We might not like poverty, we might wanna pass a law that says, you know, there should be less poverty. However, we're gonna do that. Turns out the minimum wage does that in a very scattershot way because, and I'll come back to this evidence later, being poor and being low wage. So one is, one is about your family, one is about you, they're obviously related, right? There's more low wage people in poor families. But the link is actually very weak as it turns out. Which means that if we wanna go after the poverty problem, you have to kind of go after family income. And this simple explanation for that, it's not the whole story, but a lot of it is simply that a lot of minimum wage workers are teenagers, right? Some of you may make a lot of money later on, but if you worked when you were 16 or whatever the age is in your state, you probably making close to minimum wage. Why? Because you didn't know anything. That's what, no one's gonna pay you more than that, right? But it has nothing to do. You might've been an upper middle class family, right? And that's a, that's a, a problem. We'll, we'll come back to, okay, so these facts are, I, I would say the key arguments for raising the minimum wage, help low wage workers and help poor families or help reduce poverty. Now I want to obviously setting up toter to the evidence.