Coupling a Federal Minimum Wage Hike with Public Investments to Make Work Pay and Reduce Poverty

Background:  For over a century, advocates have promoted minimum wage laws to protect workers and their families from poverty. Opponents counter that the policy has, at best, small poverty-reducing effects. This paper presents new simulations showing the impact of the minimum wage on individual family budgets as well as overall poverty rates.

Methods:  Analysis consists of two separate simulation processes; methods and findings for each are presented together. 

The household simulation uses program eligibility rules and benefit schedules to calculate net income for an exemplar family consisting of one adult and two dependent children at different earnings levels.  We model two common income supports delivered through the tax system, the Earned Income Tax Credit (EITC) and the Child  Tax Credit (CTC); the in-kind transfer from the Supplemental Nutrition Assistance Program (SNAP); subsidized housing; and subsidized childcare.

When the value of SNAP and tax credits are figured in, full-time minimum wage work at the current federal rate of $7.25 raises one or two adults families with up to three children above the poverty line, as does half-time work at the $10.15 rate or above. For families who qualify for and receive subsidized childcare and housing, full- or part-time work at any level would raise them above the poverty line. However, participating in means-tested programs leads to high marginal tax rates (MTRs), the combination of payroll and income tax rates, as well as the implicit tax rates associated with means-tested benefit reductions. Depending on the family size, wage rate, and income supports received, marginal tax rates can range from -41 percent to nearly 100 percent.

The national impact simulation models a two-part proposal – to increase the federal minimum wage to $12 per hour and to temporarily double the federal Work Opportunity Tax Credit, which incentivizes employers to hire and retain low-wage workers and those with potential labor market disadvantages, such as veterans or workers with disabilities.  Current Population Survey households are assigned new wage and employment outcomes concordant with the proposed policy, and national and subgroup poverty rates are calculated using the standard and supplemental federal poverty measures as well as depth-of-poverty.

Simulation results suggest that a federal $12 minimum wage will lead to a 16.1 percent drop in poverty when measured by the supplemental poverty measure, from 14.3 percent to 12.0 percent. Results using the original poverty line are slightly more modest. Increasing the minimum wage will also lead to net savings of $19.3 billion for the federal government, largely driven by increases in net federal taxes (including a $4.4 billion decrease in EITC outlays).

Implications: A higher federal minimum wage coupled with public investments will better target poverty than our current rate, and disproportionately benefit workers disadvantaged by race, gender, or geographic location. In sum, coupling a federal minimum wage increase with targeted public investments is an essential next step to reducing poverty and making work pay.