President Obama declared last week that “it’s well past the time to raise [the] minimum wage.” Demonstrators at fast-food restaurants in several cities also demanded a higher wage. But hiking the minimum wage is not the right policy to alleviate poverty. A better approach would be to integrate the existing minimum wage with current welfare transfer payments. This would lead to higher incomes for low-wage workers and increased employment.
First consider the downsides of raising the minimum wage. For one, it makes it harder for individuals with low skills and little experience to get or keep a job. When low-skill labor becomes more expensive, employers have a greater incentive to mechanize or outsource their work. Higher wages that are not the result of greater productivity force firms to raise prices to cover their costs—which reduces the demand for the firms’ goods and services and thus reduces employment.
Mr. Obama said in his speech that “there’s no solid evidence that a higher minimum wage costs jobs.” Not so. There are a few statistical studies that find no adverse effect on employment, but there is far more evidence that confirms that higher minimum wages do reduce employment—most recently reviewed by David Neumark, of the University of California at Irvine, and his co-researchers. A higher minimum wage leads to a trade-off: Some employees get the higher wage while others lose their jobs.
As an anti-poverty measure, the minimum wage is a crude policy that fails to distinguish between a young person who lives at home and a working mother who is the sole support of her family. That’s why there are government programs such as food stamps, housing subsidies and the earned-income tax credit designed in part for the working poor.