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Low Wages Do Not Cause Poverty

It seems to make sense that low minimum wages are the cause of poverty, but that is not necessarily the case. Low wages may not cause poverty as much as not having a job at all.

(Photo Credit: krossbow/Flickr)

The economy might offer the Devil's choice: everyone has a low wage job, or some are well-paid while others have nothing.

Over the past couple of days, we discussed with Kimberly Amadeo, the U.S. Economy Guide how simply raising the minimum wage causes problems for those it is trying to serve, and how investing in education is a better alternative. When education is accessible, more workers acquire skills that increase their earning power.

Many thanks to Ms. Amadeo for taking the time to answer a few questions about the economy and the minimum wage. This is the final installment of a three-part series addressing issues regarding wages and the economy.

Do low wages cause poverty?

A study by David Neumark and William Wascher found that minimum wages do not reduce poverty. Instead, they force an overall reduction of jobs for less-skilled workers, which reduces their earnings and adds to poverty. 

Raising the minimum wage does not create jobs because it penalizes small businesses, which create 65 percent of all new jobs.

The best solution for poverty is to create jobs by switching existing government spending to job-intensive infrastructure development, and away from so much capital-intensive defense spending. A University of Massachusetts at Amherst study found that a billion dollars spent on public works created 19,795 jobs, while the same amount spent on unemployment benefits created 19,000 jobs. A study by the Congressional Budget Office found that a tax cut to businesses for new hires only results in 18,000 jobs for every $1 billion lost in revenue.

What hourly wage would strike the best balance between workers and employers, and why?

The Federal poverty level is $23,050 for a family of four. That's equivalent to $10.60 per hour for a full-time worker. A worker making the minimum wage of $7.20 per hour would be below the poverty level.

Therefore, $11 an hour would keep workers above the poverty level. However, it really depends on the cost of living, which is why a national minimum wage is so tricky. For example, the city with the lowest cost of living is Winston-Salem, North Carolina (according to Kiplinger's). The MIT living wage calculator says that a single person must earn $8.11/hour to afford the average housing, medical, food and transportation costs to live there.

Thank you again, Kimberly Amadeo, for your insights!

Tell Us What You Think

Do you think we should raise the minimum wage? Why or why not?  Leave us a comment or join the conversation on Twitter.



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