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As I write, the Democratic Congress is contemplating various measures designed to alleviate poverty levels in the United States. They include: the doubling of the minimum wage; the expansion of child credits. Let’s review both.
Article by Eben Macdonald from Mises.
The Minimum Wage Hike
Congress intends to raise the federal minimum wage from $7.25 to $15. This makes various assumptions: first, that minimum wage workers themselves are indeed poor. This is wrong: they come from families with a median household income of $66,000; for, their median age is twenty-four years old, and 60 percent are still attending school. Secondly, this policy makes the assumption that it will have no statistically significant impact on unemployment. This is also misguided. The City of Seattle enacted a $13 minimum wage in 2016, resulting in a fall of 9 percent in hours worked among these jobs. The job turnover rate declined by 8 percent, and the city’s less experienced minimum wage workers saw no net increase in payment.
In fact, a separate study found that Seattle’s policy reduced low-wage employment by 6–7 percent, and due to the reduction in employment, workers in this category actually saw a net decline in pay. The third assumption made by this minimum wage hike is that workers will indeed see an increase in inflation-adjusted income. A crucial lesson of economics is that living standards are not determined just by nominal wages, but also the amount which such a wage can consume. Literature suggests that raising the minimum will correspond with an increase in cost of living, due to businesses offsetting higher labor costs, and therefore harm precisely those whom the policy intends to help—low-wage workers. For instance, the average childcare worker in the United States earns $11 an hour—below the threshold Congress intends to set. Therefore, higher labor costs will simply mean an increase in the cost of childcare.
One estimate found that this policy would cause, on average, childcare costs to rise by 21 percent in the United States—that’s an increase of $3,700. Some areas would inevitably be hit harder than others: for instance, the state of Mississippi would see a whopping 43 percent increase in costs. Another essential component of the cost of living is food costs. Many grocery workers work below $15 in the United States: and higher labor costs will simply mean higher inflation in the price of food, which will clearly affect low-wage workers more than high-wage ones. In fact, one study conducted by the University of Zurich found that all the income gains made by workers who had enjoyed a minimum wage increase were simply offset by higher grocery prices. There is more general evidence that raising the minimum wage raises the rate of inflation, therefore negatively impacting those very workers. A study from Canada found that minimum wage hikes can boost the CPI by at least 0.1 percent. Whilst this might not seem statistically significant, the study specified that this small increase caused interest rates to rise, thereby having negative effects on employment. Moreover, an American study (pp.19) estimated that a one third decline in the minimum wage between 1979 and 1995 lowered the CPI by 1 percent (which is of statistical significance).
Raising the minimum wage will harm precisely those it intends to help through higher unemployment and cost of living.
Expanding the Welfare State
Some economists have rosy predictions about Congress’s plan to expand child credits on poverty levels. That being said, in the 1960s, President Lyndon Johnson hoped to end poverty and racial injustice as he initiated the War on Poverty programs. $20 trillion dollars later, the American poverty rate has bounced between 12 percent and 15 percent since those programs began.
A law of the Welfare state can be said to be this: increases in public income transfers will simply be offset by reductions in private earnings. The famous Seattle-Denver Income Maintenance Experiment (SIME/DIME) found that a $1,000 increase in welfare payments is offset by a $660 reduction in private earnings. Thus, low-income families experience only a meagre increase in their standard of living, and are subject to dependency on state welfare spending.
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On top of that, welfare spending increases levels of single parenthood. This was a concern early on when Johnson’s welfare programs were initiated, and it was confirmed by a 1993 study that the welfare state was indeed responsible for the rise in single parenthood. The study postulated that a 50 percent increase in welfare spending yields a 43 percent increase in the levels of single parenthood.
I’ve argued in the past that single parenthood and a lack of full-time work are fundamental contributing factors to poverty in the United States, both of which the welfare state reinforces (in fact, the economists Isabelle Sawhill and Ron Haskin famously predicted that if single parenthood were eradicated and full-time work were universal, among other factors, poverty in the United States could be reduced by 70 percent).
Furthermore, the welfare state may negatively impact social mobility. According to research conducted by the economist Raj Chetty, there is a powerful negative correlation between the prevalence of single parenthood across the OECD and the actual levels of upward child mobility in each of those countries. In fact, there even seems to be a connection between the prevalence of single parenthood amongst the US states and poverty levels/social mobility.
Evidence strongly suggests that the welfare state does not alleviate poverty in the United States, and therefore that these poverty projections to support Congress’s proposals are overblown. A groundbreaking study postulated a Laffer curve–like relationship between poverty and welfare spending (where spending will alleviate poverty to an extent, but beyond a certain point will in fact increase poverty). The study argued that public overreach was responsible for the poverty rate being 50 percent higher than without that extra assistance (due to the impoverishing effect of dependency, single parenthood and work disincentives). This statistic ought to worry Congress, and make them think twice about these welfare proposals.
The two policies which are on Congress’s books will not, and never have, succeeded in truly benefitting low-income Americans. To accomplish this aim, they should in fact focus on welfare reform, lowering cost of living through deregulating commodities like housing, energy and childcare, removing labor regulations which exclude poor, inexperienced workers from employment, and thinking twice about inflating the money supply during recessions, which erodes the paychecks of low-income earners.
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