Would Raising the Minimum Wage Reduce Welfare Spending?

Proponents of the minimum wage increases argue that an increase would save the government money in social support services, the idea being that individuals whose earnings increase as a result of the wage hike would be less likely to seek and need welfare benefits. However, an analysis by the Ben Gitis of the American Action Forum demonstrates that the cost in lost jobs would be much higher than any savings in reduced welfare spending.

Research from the Economic Policy Institute contends that an increase in the minimum wage to $10.10 per hour would cut welfare spending by $7.6 billion — a drop in the bucket compared to the $200 billion the government spends on low-income families. Gitis explains why the reduction is relatively small: most minimum wage workers are not actually in poverty. In fact, just one-fifth of the people earning the minimum wage are in poverty, while 36.6 percent of minimum wage earners live with their parents and have household incomes that average more than $100,000 annually.

Moreover, Gitis says the reduction in welfare spending ignores the much larger labor market consequences that result from raising the minimum wage: lost jobs. He explains:

– A recent study indicates that a 10 percent increase in the minimum wage is associated with a 0.5 percentage point drop in the job growth rate.
– Using that research, Gitis determines that America would lose 2.2 million new jobs across the nation were the wage raised to $10.10 per hour.
– Those job losses total $19.8 billion in annual lost earnings.

Gitis contends that minimum wage advocates touting a reduction in welfare spending ignore the significant and negative labor market consequences of raising the minimum wage.

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