Project:
Does the Minimum Wage Affect Welfare Caseloads?

Year: 1999

Research Center: Joint Center for Poverty Research, University of Chicago and Northwestern University

Investigator: Page, Marianne E.

Institution: University of California at Davis

Project Contact:
Marianne E. Page, Department of Economics
University of California at Davis
One Shields Avenue
Davis, CA 95616-8578
530-752-1551, fax: 530-752-9382
mepage@ucdavis.edu

The degree to which minimum wages affect employment has been of interest to economists and policymakers for many years. This interest has stemmed largely from a potential inconsistency between the intent of minimum wage laws and their theoretical effects. The goal of minimum wage policy is to increase an individual’s ability to support a family and avoid welfare through full-time work. But the conventional neoclassical model of competitive labor markets predicts that higher wages come at the expense of lower employment levels. For minimum wages to improve total wage payments to low-skill workers, the demand curve for low-skilled labor must be relatively inelastic.

Most empirical research on minimum wages has focused on the relationship between minimum wage increases and employment rates, especially among teenagers. To date, there have been no studies that estimate the impact of minimum wage legislation on potential welfare recipients. Passage of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) intensifies the need to understand the relationship between work and welfare.

In this study, Page uses variation in minimum wages across States and over time to estimate the minimum wage effect on the size of State welfare caseloads. Data are for 1983 to 1996. Her model includes a number of explanatory variables, including the average production wage, gross State product, current and lagged unemployment rates by State, and a number of socioeconomic variables. Her empirical results indicate that, controlling for these factors, State, and time trends, the elasticity of the welfare caseload with respect to the minimum wage is between 0.1 and 0.2. In other words, a 35-percent increase in the minimum wage, like the increase recently implemented in California, could lead to a 3- to 7-percent increase in the size of the welfare caseload, all else remaining equal. These results are remarkably stable to the inclusion of additional variables that influence the evolution of caseloads over time, such as State-specific welfare reforms and changes in a State’s political climate.

These results suggest that minimum wages, which are intended to improve the financial independence of low-skilled workers, appear to have an important side effect: the wage gains experienced by those who keep their jobs are accompanied by an increase in the welfare rolls. Page argues that policies like the Earned Income Tax Credit, which increases income through the tax code without depressing the demand for low-skill labor, are likely to be more effective than minimum wages in facilitating the transition from welfare to work.