Separating signal from noise: a review of 12 major studies on minimum wages and poverty

Excerpted from Section 2 of my paper:  Minimum Wages and the Distribution of Family Incomes. Key sections are in bold. Alterations (but not deletions) from the paper are marked in square brackets [ ].

In this [post], I review the key papers on the topic of minimum wages and [poverty] based on U.S. data, and discuss their findings and limitations. My primary goal here is to provide a quantitative summary of the existing evidence, focusing on the [official] poverty rate elasticity as the most commonly estimated distributional statistic. [A poverty rate elasticity with respect to the minimum wage of, say, -0.2 means that a 10 percent increase in the minimum wage reduces the poverty rate by 2 percent. Note that this is different from a 2 percentage point reduction in the poverty rate.]

I begin by describing the process of selecting studies for this review. First, I only consider peer-reviewed publications since the early 1990s, i.e., the beginning of the “new economics of the minimum wage” literature. Second, I only include studies that report estimates for some statistic based on family incomes (such as poverty, quantiles, etc), and not other outcomes such as utilization of public assistance. Third, studies are included only when they empirically estimate the effect of minimum wages, as opposed to simulate such effects. This selection process yields 13 studies, 12 of which are used in my quantitative summary.

As a way to quantify the existing evidence, Table 1 reports the key estimates from the 12 studies for which I could construct an elasticity of the poverty rate with respect to the minimum wage. When the original estimates are not reported as poverty rate elasticities, I use information in the paper to convert them (and standard errors) to that format for comparability. To minimize the impact of subjective judgment, I have used the following guidelines for selecting estimates. (1.) I report estimates for all of the demographic groups studied in each paper; the sole exception is for workers, since minimum wages can affect who is in that group and lead to sample selection problems. (2.) When a study uses multiple econometric specifications, I include all of them in Table 1, except: (a.) the handful of estimates that did not include state and time fixed effects (or equivalent) as controls; (b.) estimates from sub-periods reported in a few of the papers, and (c.) specifications with lagged minimum wages reported in a few of the papers. Overall, these guidelines lead me to report 54 elasticities in Table 1, which represent either all or nearly all of the estimates of minimum wage impact on the poverty rate available in each of the papers.

Card and Krueger (1995) consider the short run impact of the 1990 federal minimum wage increase on the poverty rate for those 16 years or older, and regress the change in the state-level poverty rate between 1989 and 1991 on the the proportion earning below the new federal wage in 1989 (“fraction affected”).  Their bivariate specification has an implied minimum wage elasticity for the poverty rate of -0.39, but controls for employment and regional trends reduce the overall elasticity in magnitude to the range (-0.36, -0.08), and the estimates are not statistically significant at the conventional levels. They also find that the 10th percentile of the (unadjusted) family earnings distribution responds positively to the minimum wage increase, with an implied elasticity between 0.28 (bivariate) and 0.20 (with controls); these are statistically significant at conventional levels. A major problem with this analysis is that the estimates are imprecise. This is mainly due to the very short panel structure. For example, the 95 percent confidence interval associated with the poverty rate elasticity in their most saturated model is quite wide: (-0.65, 0.49).

Addison and Blackburn (1999) consider teens, young adults, and junior high dropouts between 1983-1996. Using state-year aggregated data and two-way fixed effects, they find sizable poverty rate elasticities for teens and junior high dropouts in the range of (-0.61, -0.17), with an average of -0.43. They find more modest sized estimates for young adults (an average elasticity of -0.24). Morgan and Kickham (2001) study child poverty using a two-way fixed effects model with data between 1987 and 1996, and find a poverty rate elasticity of -0.39. Stevans and Sessions (2001) consider the overall poverty rate in the 1984-1998 period; their most comparable estimate is from a two-way fixed effects model, and appears to yield an elasticity of -0.28. Gunderson and Ziliak (2004) consider the impact of a variety of social policies on the poverty rate and the squared poverty gap using both post and pre-tax income data between 1981 and 2000. For the population overall, they find a small overall poverty rate elasticity of -0.03, with a range of -0.02 to -0.06 across demographic groups. However, they specifically control for the wage distribution, including the ratio of 80th-to-20th percentile wages. This inclusion of the inequality measures is problematic, as it could block the key channel through which minimum wages would actually reduce poverty, namely raising wages at the lower end of the wage distribution. DeFina (2008) uses state-aggregated data from 1991-2002 and finds that minimum wages reduce child poverty in female-headed families, including those headed by someone without a college degree. The estimated poverty rate elasticities are -0.42 and -0.35, respectively.

Burkhauser and Sabia (2007) examine the effects on state-level poverty rates for 16-64 year olds and single mothers during the 1988-2003 period using specifications with two-way fixed effects. Depending on controls, their estimates of the poverty rate elasticity range between -0.08 and -0.19 for the population overall, and between -0.07 and -0.16 for single mothers. While none of the estimates are statistically significant, the point estimates are all negative, and the confidence intervals are consistent with sizable effects. In a follow-up study, Sabia and Burkhauser (2010) consider the 2003-2007 period and find little effect [of minimum wages on poverty]. This study is limited by a rather short sample period. Since it is an update of their previous paper, it is unfortunate that they do not also report estimates using the full sample (1988-2007) instead of just considering a five year period. While their point estimate is small (-0.05), the 95 percent confidence interval is fairly wide (-0.34, 0.24).

Sabia (2008) uses individual level CPS data from 1992-2005, and a two-way fixed effects specification augmented with state-specific quadratic trends to study the effect on single mothers. He finds statistically insignificant but again mostly negative and often sizable estimates, with a poverty rate elasticity of -0.22 from his main specification; for single mothers without a high school degree, the estimate is larger in magnitude (-0.28) while still not statistically significant. Sabia and Nielsen (2013) use the SIPP between 1996-2007 and find an overall point estimate of -0.31 (without state-specific linear trends) or -0.03 (with trends). However, these are imprecise estimates, as the 95 percent confidence intervals are (-0.93, 0.30) and (-0.27, 0.22), respectively—the former set is consistent with nearly all other estimates in the literature. Their estimates also appear to be sensitive to the inclusion of state-specific trends, but again, the imprecision of the estimates makes it difficult to draw any firm conclusion. Overall, two of the four papers coauthored by Burkhauser and/or Sabia suggest small to modest negative effects, while the other two produce fairly imprecise or fragile estimates. However, the overall evidence from their papers does not actually rule out moderate sized poverty rate elasticities.

Neumark and Wascher have coauthored three papers that are of particular relevance. Neumark and Wascher (2002) consider movements in and out of poverty by forming two-year panels of families with matched March CPS data between 1986 and 1995. Because they do not directly estimate the effect of the policy on poverty rates, Table 1 does not include estimates from this paper. [However, in a related paper], Neumark, Schweitzer and Wascher (2005) also use [the same data] between 1986 and 1995. They estimate the effect of discrete minimum wage [changes] on the distribution of the income-to-needs ratio, and their estimates suggest that an increase in the minimum wage actually increases the fraction of the population in poverty: they report a poverty rate elasticity of +0.39.

This is the only paper in the literature that I am aware of which finds such a [clear] poverty-increasing impact of the policy for the overall population. [H]owever, there are numerous non-standard aspects of their research design. Their method does not properly account for state and year fixed effects. They “mimic” state and year fixed effects by shrinking all families’ incomes by the proportionate change in the median income in that state (pooled over years) and also by analogously shrinking the median change in that year (pooled over states).  This constitutes an assumption that state and year effects are scale shifts that proportionately shrink the entire family income distribution. In other words, they impose the assumption that various counterfactual quantiles in states are moving proportionately to the median, which is an unattractive assumption, and much more restrictive than the inclusion of state and year dummies in a regression of the poverty rate on minimum wages [which is the standard approach]. Additionally, they use an ad hoc adjustment in the change in densities to account for the fact that some observations have both contemporaneous and lagged increases. These non-standard techniques raise serious questions about the study, especially since it stands out in terms of producing a sizable positive poverty rate elasticity. To my knowledge, no one, including any of the authors, has used this methodology in any previous or subsequent paper.

In contrast, Neumark and Wascher (2011) uses a more conventional approach to study the interactive effects of EITC with minimum wages over the 1997-2006 period. Although their focus is mostly on wage and employment effects, they do provide some evidence of minimum wage effects on the share of 21-44 year olds with incomes below the poverty line and one-half the poverty line.  Like most of the literature, they include state and year fixed effects; they also include demographic and state-level controls similar to this paper. Unfortunately, the authors do not report an overall minimum wage effect, and instead focus on their interaction effects with EITC. However, we can use the regression coefficients along with other information provided in that paper to back out a poverty rate elasticity with respect to the minimum wage using straightforward calculations. For the broadest group that they considered—21-44 year old family heads or individuals—their results suggest a minimum wage elasticity of -0.29 for the proportion with an income under the poverty line, and -0.45 for the proportion with an income less than half the poverty line (“extreme poverty”).  For a group constituting the majority of non-elderly adults (and representing many children as well), the evidence from Neumark and Wascher (2011) suggests that minimum wages have a moderate-sized impact in reducing poverty and extreme poverty. These results seem to be qualitatively different from the findings in Neumark et al. (2005), and much more similar to rest of the literature.

To take stock, the results in this literature are varied and sometimes appear to be inconsistent with each other. But is it possible to filter out some of the noise and actually obtain a signal? First, I note that across these 12 studies, nearly all (48) of the 54 estimates of the poverty rate elasticity are negative in sign. Indeed, only one study by Neumark et al. (2005) suggests that minimum wages actually increase the overall poverty rate. Moreover, this study uses an unconventional methodology that is both different from all other studies, and is also problematic.

Second, if we take an “average of averages” of the poverty rate elasticities for the overall population across the seven studies that provide such an estimate so that (1) each study is weighted equally, and (2) within each study, all specifications reported in Table 2 are weighted equally as well, we obtain an average poverty rate elasticity of -0.07. However, excluding Neumark et al. (2005) [which uses a problematic and unconventional methodology], the “average of averages” of the poverty rate elasticities is -0.15. [Overall] the existing evidence points towards a modest impact on the overall poverty rate.

Besides these seven studies, five additional studies reviewed here provide estimates for subsets of the population. If we take an “average of averages” of the poverty rate elasticities across all 12 studies, while (1) weighting each study equally, and (2) weighting each specification and group within study equally as well, we also obtain an elasticity of -0.15. If we exclude Neumark et al. (2005), the “average of averages” across the 11 studies is -0.20. There are, of course, other ways of aggregating estimates across studies. However, when I consider the set of nearly all available estimates of the effect of minimum wages on poverty, the weight of the evidence suggests that minimum wages tend to have a small to moderate sized impact in reducing poverty. [Below, I also plot histograms of all 54 elasticities—both unweighted, as well as weighted by the inverse of the number of estimates in each of the 12 studies, so that each study is weighted equally.]

While there is a signal in the literature that minimum wages tend to reduce poverty, it is also true that the existing evidence is clouded by serious limitations. These include (1) inadequate assessment of time-varying state-level heterogeneity [i.e., states with high and low minimum wages have very different trajectories on a host of dimensions unrelated to the policy]; (2) limited sample length and/or exclusion of more recent years that have experienced substantially more variation in minimum wages; (3) insufficient attention to serial correlation [which means many of the tests of statistical significance may be incorrect]; (4) use of questionable estimators; and (5) frequent omission of demographic and other covariates. In [my own analysis], I use more and better data along with more robust forms of controls to address these limitations in the existing literature.