The Effects of Higher Minimum Wages on Welfare Recipiency

In his State of the Union Address, President Clinton again called for an increase in the federal minimum wage in two 50-cent increments, from $5.15 to $6.15 per hour. Once again business groups and some economists argue that raising the minimum wage hinders the employment prospects of low-skilled workers. Not surprisingly, most welfare recipients are low-skilled (Ellwood, 1986). Some contend that raising the minimum wage impedes welfare-to-work transitions. Alternatively, others argue that higher minimum wages draw women off welfare into employment. This study examines the relationship between minimum wage increases and welfare recipiency. Using the 1990 and 1991 Survey of Income and Program Participation (SIPP), I examine the effect a minimum wage increase would have on welfare participation at a point in time (static models), and use discrete time hazard models (dynamic models) to assess whether higher minimum wages affect the propensity of exiting and of re-entering Aid to Families with Dependent Children (AFDC), the predecessor to Temporary Aid to Needy Families (TANF). The main independent variable, effective minimum wage (defined as the higher of state and federal minimum wages) varies over time and across states. Controlling for an array of factors, static models predict that a 50-cent minimum wage increase would reduce welfare participation by 1.3 percentage points, resulting in 41,000 fewer single mothers receiving welfare. Dynamic models predict that the higher minimum wage would increase welfare exit rates by 2.5 percentage points and would have no effect on former welfare recipients' chances of re-entering welfare.