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The Effect of Minimum Wage Policy on Poverty Reduction Essay

1 Introduction

Minimum wage policies are widespread throughout the world. More than 90% of all countries have a minimum wage policy (International Labour Office, 2009, p. 34). Although the goals of mandating and maintaining a minimum wage, such as the reduction of poverty and the creation of income equality, are widely accepted around the world, there is a disagreement about the policy’s efficacy regarding these goals. Opponents of setting a minimum wage argue that it leads to unemployment, and it does not result in the reduction of poverty (Burkhauser & Sabia, 2007, p. 263). Meanwhile, employment plays an important role in poverty alleviation, because it secures income and empowerment for the poor (United Nations, 2005).

However, proponents of the minimum wage policy appoint that the policy leads to decrease in poverty rates and the unemployment effect is not significant (Lustig and McLeod, 1997). That means, there is controversy over the use of minimum wage as an anti-poverty tool, and this makes the topic interesting to study. This paper will evaluate the extent to which the minimum wage policy is an effective anti-poverty tool. The evaluation will be based on literary reviews of scientific articles and theoretical materials regarding the influence of minimum wage on employment and poverty. Such a focus is selected because studying the effect of minimum wage only on employment does not lead to a conclusion about the influence of minimum wage on poverty.

Even if the unemployment effect is moderate, an increase in the minimum wage leads to net income losses for poor families (Neumark & Wascher, 1997, p. 1). In addition, criteria such as the effect of minimum wage on employment and poverty level will be used for evaluation of efficacy of minimum wage policy as anti-poverty tool. The paper will be structured in the following way: section two will provide a summary of works related to the topic; in section three, the selected assessment criteria will be described; evaluation and the conclusion will be presented in section four and five respectively. 2 Theoretical framework

A few empirical investigations were made to find evidence in favour or against the minimum wage as an anti-poverty tool. There are several research studies that demonstrate that the minimum wage policy is an ineffective means of achieving poverty reduction in many cases because of the unemployment effect . Neumark and Wascher (1997) conducted one such investigation. They studied the effect of minimum wage on poverty on the basis of changes in net income of poor families. The researchers discovered that raising minimum wages increases the probability that some poor families escape poverty and the probability that, initially, non-poor families fall into poverty.

The discovered result supposes that the unemployment effect combined with minimum wage increases causes reductions in the income of previously non-poor families (Neumark & Wascher,1997, p. 3). The conclusion of Neumark and Wascher (1997, p. 31) is that there is no strong evidence to support the idea that minimum wage policy helps in poverty alleviation because of the concomitant unemployment effect of minimum wage. Another research study was conducted on the basis of Brazilian microdata by Paes de Baros, Carlos, and Samir (as cited in Gindling & Terrell, 2010). The result of the research showed that there was no effect of the minimum wage on poverty because the unemployment effects of the minimum wage increase.

Pauw and Leibbrandt (2012) also decided to check the efficacy of minimum wage as an anti-poverty tool. To investigate the influence of the minimum wage policy on poverty in South Africa, they used an advanced micro-simulation model, which assesses the distribution of employment gains and losses and the implications for household income. The results showed that minimum wages led to a marginal decline of poverty. Moreover, job losses, price increase and income decline are more likely to affect the poorest. The investigators found that the minimum wage policy targets a small fraction of the poor.

As such, they concluded that the policy was not an effective tool in South Africa because it was not well targeted (Pauw & Leibbrandt, 2012, p. 780). However, there are few empirical research studies that prove that the minimum wage policy reaches the poor. The first estimates on the effect of minimum wages on poverty were made in the United States by Card and Krueger (as cited by Gindling & Terrell, 2010). They used regression analysis to examine the change in the poverty rate of states from 1989 to 1991 and took into consideration only a small fraction of workers who were influenced by the minimum wage increase. The researchers found weak evidence of a modest poverty reduction effect because of the minimum wage increase. Lustig and McLeod (1997) also investigated the effect of the minimum wage on poverty but in Latin America and Asia.

They concluded that an increase or fall in minimum wage leads respectively to a decline or increase in the poverty rates in developing countries (Lustig & McLeod, 1997, p. 81). However, it was also noticed by the investigators that an increase in the minimum wage could increase slightly unemployment. (Lustig & McLeod, 1997, p. 77). In addition, they mentioned that even if the minimum wage is shown to reduce poverty in the short run, employment opportunities could decrease in the long run.

The result of research by Saget (2001, p. 22) shows that an increase in minimum wage reduces poverty; however, for a set of Latin American countries, where regression analyses were made on the basis of a one- or two-dollar poverty line, there was no effect on the poverty level. Moreover, they remark that the result confirms their intuition that minimum wages in developing countries do not influence the poorest population but the low-income population of the upper level instead. The empirical research of Gindling and Terrell (2010) regarding the influence of minimum wage on poverty in Honduras provided evidence that a raise in the minimum wage had a modest poverty-reducing effect.

The results are true for the formal sector and could be higher, if there was no the unemployment effect in the formal sector. Moreover, the researchers suggested that those who lost jobs probably found jobs in the informal sector, where the minimum wage regulation does not hold power (Gindling & Terrell, p. 915). Although in the majority of studies above, the unemployment effect of the minimum wage policy is mentioned, Card and Kruger (1994, In: Ropponen, 2011) discovered that a minimum wage increase can lead to an increase in employment. Such evidence they received by investigating fast food restaurants in New Jersey in 1992. Thus, there are several studies that provide evidence both in favour and against the minimum wage policy as anti-poverty tool.

3 Criteria Two criteria were selected for the evaluation of the extent to which the minimum wage is an effective tool for poverty alleviation: They are the influence of the minimum wage on the poverty level and its effect on the employment of the poor. The measuring of the effect of the minimum wage on the poverty level supposes focusing on the transition into poverty and out of poverty and the changes in poverty rates. Such a focus follows from the analysis of theoretical frameworks, where researchers used poverty rates (Gindling & Terrell, 2010) or transitions out or into poverty for the evaluation of the influence of the minimum wage on poverty (Neumark & Wascher, 1997).

The employment effect of minimum wage criterion was selected because in the theoretical framework, the employment effect seems to be a critical factor that identifies the effectiveness of the minimum wage as an anti-poverty tool. For example, Samir, (as cited in Gindling & Terrell, 2010) mentions that there is no effect of the minimum wage policy if the employment effect increases. These criteria will be applied by finding in the empirical investigations the evidence of the negative or positive changes in the poverty level and employment or the evidence of the absence of corresponding minimum wage influences. After that, evidence will be weighed, and a decision about the effectiveness of maintaining a minimum wage will be made.

4 Evaluation

Although economists agree that the primary goal of minimum wage policy is poverty alleviation, many disagree about its effectiveness as an anti-poverty tool, as shown in section 2 of this paper. In this section, arguments for and against the policy were compared using criteria from section 3, evaluating the extent to which minimum wage served as an effective anti-poverty tool.

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