Minimum wage laws are ineffective at reducing poverty and inequality---less wealthy individuals would suffer more during recessions

A large number of recent studies explore the effects of minimum wage increases on poverty, the vast majority of which find little evidence that the minimum wage is an effective antipoverty tool [8]. An emerging literature also finds little evidence that minimum wages are effective at reducing consumption-based deprivation, or material hardship [9]. But could the poverty effects of minimum wages differ over the business cycle?

It is argued that many poor individuals do not work and, therefore, will not directly benefit from minimum wage increases. And many more poor individuals will be unemployed during recessions, which will further undermine the poverty-alleviating effects of minimum wages during downturns. In addition, many poor (or near poor) workers earn hourly wages greater than newly proposed minimum wage levels and hence will also not directly benefit from such increases; their poverty status is more often the result of low work hours or living in a large family. For example, nearly 50% of poor workers in the US earn wages above a proposed $10.10 minimum wage [10].

Finally, even among the relatively small number of poor individuals who are affected by minimum wage increases, adverse labor demand effects may undermine attempts to raise their net earnings. Studies focusing on these workers find that those in poor families who do not lose their jobs, or have their hours substantially reduced, see their earnings rise and their households lifted out of poverty. However, other near-poor workers experience minimum wage-induced job loss or hours reductions, causing earnings losses and increased poverty [8]. And if adverse employment effects are larger during recessions, minimum wage increases may have particularly adverse distributional consequences during economic downturns.

The literature on the poverty effects of minimum wages over the business cycle is even more nascent than that on employment effects over the business cycle. The one working paper that looked at this finds little consistent evidence that poverty effects of minimum wages differ over the business cycle [11]. The results of this paper suggest that increases in minimum wages are generally ineffective at reducing poverty during expansions and recessions.