An article in the WSJ this week is causing a bit of a stir.
Titled “Who Really Gets the Minimum Wage”, the report concluded that Minimum wages are ineffective at helping poor families because such a small share of the benefits flow to them.
Specifically, “Obama’s $10.10 target would steer only 18% of the benefits to poor families; 29% would go to families with incomes three times the poverty level.”
How does that happen?
The essence of the dynamic: counter-intuitively, low-wage workers and low-income (i.e. “poor”) families are not the same folks.
According to the article, data from the U.S. Census Bureau show that there is only a weak relationship between being a low-wage worker and being poor.
Three reasons for that:.
- Many low-wage workers are in higher-income families—workers who are not the primary breadwinners and often contribute a small share of their family’s income.
- Some workers in poor families earn higher wages but don’t work enough hours (and have hours cut when the minimum wage goes up)
- About half of poor families have no workers, in which case a higher minimum wage does no good. This is simple descriptive evidence and is not disputed by economists.
Bottom line: Not much help to the well-intended anti-poverty movement.
There’s another “non-poor” group that benefits when the minimum wage is raised..
Glance at the picture above and see if you can guess who that is.
Hint: My imagination, or is the guy on the right wearing a purple SEIU t-shirt?
Yep, unions are major beneficiaries when the minimum wage is hiked.
How can that be since union workers always get paid more than the minimum wage?
There are two basic ways that union wages get a boost from increases in the minimum wage.
First, some basic economics …
As the minimum wage increases, the pay gap between union workers (usually skilled) and minimum wager earners )usually unskilled) narrows … making union workers comparatively more attractive to employers.
So, in theory, union wages get bid up until the “equilibrium gap” is restored.
Second, union wages are often contractually tied to the minimum wage …
Some, union contracts have automatic escalators that get triggered when the minimum wage goes up.
If the minimum wage is hiked, union wages – often across the board, not just at the lowest rungs – get jacked up to maintain their relationship to the minimum wage.
Other union contracts have automatic renegotiation clauses that kick-in when the minimum wage is raised.
And, for all unions, the minimum wage is one factor that goes into any new contract terms.
For more detail, see WSJ: “Why Unions Want a Higher Minimum Wage “
There you have it.
Raising the minimum wage gets sold as an anti-poverty initiative … but ends up really benefiting higher income families and unions.
P.S. I’m betting that unionized Federal government workers has automatic wage escalators in their contracts …