The Minimum Wage Is Almost Irrelevant to California's Poor

Let's stop the charade about the minimum wage. It is not an effective anti-poverty policy tool. In fact, it could actually be more harmful than inaction.

Before I go about explaining, here's some background regarding California's minimum wage. Raised to $8 per hour in 2008, multiple attempts to raise it further failed until 2013 when AB 10 passed the legislature and was signed into law by Governor Brown. It raised the wage to $9 per hour as of last July and will further increase the wage to $10 per hour on January 1, 2016. But that wasn't enough for many in Sacramento - especially as they were being outdone by many city councils like Los Angeles, which recently passed a minimum wage hike to $15 per hour by 2020. On Monday, despite AB 10 not even being fully implemented, the California State Senate passed SB 3, which, as currently written, would increase the minimum wage on January 1, 2016 to $11 per hour, to $13 per hour the following year, and after 2019, would index the wage to inflation.

SB 3 may not become law - the Assembly still must pass it and Governor Brown must still sign it, both presenting obstacles to the legislation - but the message is clear: California's Democratic leaders still view the minimum wage as a powerful (and necessary) anti-poverty tool. But for a policy to impact the poor, it must actually affect them. And that's the first problem with the minimum wage; it doesn't discriminate based on household income.

To highlight, let's look at who was affected by the July 2014 AB 10 increase. Based on the 2013 Current Population Survey (CPS), the median age for a worker making $9 per hour was 26, with just under 1/3 of such workers being 21 or younger. This, immediately, raises some red flags. Based on this information, it would appear that the typical minimum wage worker is more likely to be either a) still in school or b) just starting their professional career. While this isn't enough information alone to determine whether they are in poverty or not, it does suggest that even if the individual is poor, it is likely to be transitional poverty, rather than fundamental, structural poverty that requires government action.

But the CPS does allow us to determine what kind of households these workers live in. And here we find that approximately half of minimum wage workers live, in fact, in middle or high-income households. Just 53% of minimum wage workers are members of the lowest or second income quintile households. Looking at the federal poverty line, rather than income quintiles reinforces this point. Just 49% of those making the minimum wage fall under 200% of the federal poverty line. At face value, the demographics of minimum wage earners mean that an increase in the wage will equally affect someone who isn't poor as someone who is. As a tool to eliminate poverty, this reality makes the minimum wage woefully inefficient.

However, as I explored in a RealClearMarkets piece on the minimum wage last July, the minimum wage paradigm could actually result in reduced employment for those workers who need it the most, making a minimum wage increase actually detrimental to the very people it is intended to help. First, we know that the minimum wage isn't income discriminatory, but beyond that, over half of minimum wage workers are in industries with above average unemployment rates, such as retail and leisure. This means there is significant labor slack in the industries most affected by minimum wage policy. This slack makes it more likely for employers to prefer higher-skilled minimum wage labor over low-skilled labor. Since it is more likely that those in lower income households are lower-skilled labor, this suggests that it is more likely that any workplace displacement effects of a minimum wage increase would be clustered among the half of minimum wage workers who are indeed poor. As such, it could be the case that a minimum wage increase doesn't impact all minimum wage workers equally, but rather the benefits are skewed toward those workers from higher income households (i.e. the higher skilled labor) at the expense of those truly in poverty. If this is the case, the difference for poor minimum wage workers isn't $10 per hour vs. $11 per hour; it is likely to be $10 per hour vs. $0 per hour.

Helping the poor is a worthy and important responsibility of the California state government, but it must do it efficiently and effectively to have a true impact. Policymaking by optics and rhetoric isn't sufficient and actually could be detrimental. Focusing on educational quality and professional training while also reforming the state's welfare system with a focus toward EITC-style policies would likely have a better and more sustainable impact on those Californians stuck in poverty.