Courtesy of Liberal And Proud Of It, with over 4,800 likes and 10,400 shares.  This meme claims it’s a fact that raising the minimum wage will reduce reliance on welfare programs.  Of course, there is no source given, so it needs to be investigated unless we just take their word as gospel.  What does the evidence and laws of economics say?  Does raising minimum wage reduce welfare?

There are far fewer studies that look at minimum wage effects relating to welfare than the more popular topic of minimum wage effecting employment or poverty, but here are the highlights of the recent literature.

From the Left

On the side supporting this meme is a study done by the left-leaning Center for American Progress.  Their 2014 study found that increasing the minimum wage by 10% would result in the SNAP (food stamp) enrollment decreasing by about 3%.  They also estimated a larger increase to $10.10 would reduce it by about 8%.  According to them, this would result in a savings of $4.6 billion per year for the SNAP program.  However, this study only takes into account SNAP enrollment, and these are just predictions.

From the Right

On the other side, the right-leaning American Action Forum researched a 2014 study that concluded the small savings in safety net expenses of $7.6 billion would be eclipsed by the $19.8 billion in lost earnings per year as a result of job losses from a $10.10 minimum wage, leaving us worse off.  Again, these are just predictions based off models.

From the “Middle”

The “non-partisan” Congressional Budget Office released a 2014 report that predicted little change to the Federal Budget regarding a minimum wage increase.  It said there would be a small decrease in the budget for the first few years, followed by a small increase in deficits thereafter.  It noted that some workers would gain income resulting in more tax revenue and less welfare payments, while others would lose employment altogether and use more welfare.  It also noted the minimum wage would result in higher prices that the government would pay for goods and services.  Again, just predictions, but supposedly ones made without bias.

The Best Available Study

The newest and most comprehensive study appears to be from Dr. Joseph Sabia and Thanh Nguyen from San Diego State University.  In their study, they examined 35 years of government data across a number of different data sets.  Not only did they look at SNAP, but also Medicaid, the Free and Reduced Price School Nutrition (FRPL) program, Housing Assistance programs (e.g. Section 8 housing ), Temporary Assistance for Needy Families (TANF), and the Special Supplemental Nutrition Program for Women, Infants and Children (WIC).  They found no correlation that the minimum wage decreased welfare payments.  In their words:

Our findings suggest that minimum wage increases are

largely ineffective at reducing net participation in public

assistance programs or in reducing expenditures on

means tested public assistance, particularly during non-

expansionary times. These findings are true across public

programs, time periods examined, and data sources. Only

for the SNAP program is there some (inconsistent) evidence

that higher minimum wages reduce program participation.

• Only 3.9% of workers make the current minimum wage
• Only 1.8% of full-time workers make minimum wage
• Nearly 1/2 of minimum wage workers are under 25

Clearly, there are not many minimum wage earners working full-time supporting a family.  Most of these jobs are part-time, entry level positions meant for workers with little to no work skills, many who live with their parents.  While raising the minimum wage to $10, or $15 would certainly affect a higher percentage of workers, it will also have similar negative effects.  Some workers would be helped by an increased wage, while some would either lose jobs, or be effectively barred from entering the work force.  The question becomes would increasing the minimum wage help or hurt overall?

What Does Economic Theory Tell Us?

Basic economics teaches us that the demand curve always slopes downward, so we know that all things being equal, a higher minimum wage will result in less people being employed than would be absent the intervention.  The higher it’s raised, the greater is the effect.  If the minimum wage was raised to $1,000/hr, it would be illegal for almost everyone to work, and there would be extremely little demand for labor (just like if we raised the price of milk to $1,000/gallon no one would buy milk).  This sort of law would clearly result in economic destruction.  Most people grasp this intuitively, but some claim a small raise would not affect jobs and end up helping more people than it hurts.  Logically, this is similar to the realization that fire boils water, but claiming a small fire won’t heat it up.

A logical study of economics tells us that increasing minimum wage above the market level will result in unemployment and a “dead weight loss”.  For a quick tutorial, watch the video below.

In economics, as in the rest of life, we can’t get something for nothing, and there’s no short cuts.  The idea that we can simply decree workers will get more money and unleash prosperity flies in the face of not only logic, but economic theory.  It would be the equivalent of voodoo medicine.  This is probably why politicians rarely increase the minimum wage rapidly, or all at once.  They are generally small, incremented raises that make it difficult to see their true effects.  When the minimum wage is hiked substantially, there are predictable effects, as in America Samoa.  In 2007, the US Congress raised their minimum wage significantly, which resulted in economic disaster, massive unemployment, the decimation of their tuna canning industry, and, one can assume, increased welfare reliance.

The reality is that minimum wage increases will end up hurting the least skilled and most disadvantaged groups the most, as they are on the economic margin.  We can see this empirically, as the black youth unemployment rate is over 23%, while Asian adults are below 4%.  Hiking the minimum wage even more would impact black youths much more than Asian adults, as it would affect every group with the least skills and education most.  Over time, this leads to segments of society that have difficulty getting into the workforce, and aren’t able to develop work-related skills, causing systemic unemployment and reliance on government assistance.

It’s true that some will benefit from minimum wage, but this is the longstanding difficulty in economics.  We can point to those who are helped, but the one’s who are hurt are less obvious, and are the “unseen”.  Minimum wage advocates will say the increased wages for those employed will help the overall economy, as those employees spend more, but somehow this effect curiously goes away (by their own admission) if it was raised to $25 or $50/hr, with no coherent economic explanation.

These logical realities are usually left out of these economic studies, but are very real, and are necessary in thinking about economic issues.

Conclusion

In looking at the economic literature, there is little empirical evidence to support this meme’s claim that raising minimum wage reduce welfare payments.  In fact, the most comprehensive study says the opposite.  Furthermore, economic theory and logical analysis of supply and demand tell us that the least skilled and most disadvantaged groups will be harmed, which would likely result in higher welfare costs in the future.