Will the Passage of Prop 206 Help Reduce Poverty in Arizona?

By: Robert Buddingh

In the November 2016 general election, Arizona voters approved Proposition 206.[1] Along with mandating employers to guarantee paid sick time to their employees, this measure will annually increase the minimum wage during the start of the next four years.[2] The current minimum wage in Arizona in 2016 is $8.05 per hour and is adjusted based on the cost of living in the state (this results in minor changes from year to year; had Prop 206 not been approved, the minimum wage for 2017 would’ve increased to $8.15 per hour).[3] With Proposition 206, the state minimum wage statute (ARS 23-363) will increase to $10.00 per hour in 2017 and to $12.00 per hour in 2020, with incremental increases in between, and with the minimum wage to increase in 2021 and beyond in accordance with the increase in the cost of living.[4] The current federal minimum wage is $7.25 per hour.[5]

Arizona has a larger than average amount of residents at or below the poverty line compared to the rest of the nation. While the U.S. in general had 14.7% of residents living in poverty in 2015, Arizona had the higher rate of 17.4%.[6] Both of these rates have steadily declined in the aftermath of the Great Recession.[7] It is important to note that the income one needs to earn in order to not be considered in poverty depends largely on the size of the family one is supporting. If one is part of their own single family household, then they need to earn around $12,000 in a year or more in order to not be considered living in poverty.[8] From there it goes up around another $4,000 for each additional family member (so a family of four needs to earn around $24,000 in order to not be considered impoverished).[9]

Minimum wage laws have been in effect in this country for over 100 years, but their effect on poverty has not really been documented well until much more recently.[10] The classic argument for having a higher minimum wage is that it will help people earn a “living wage” (meaning they earn enough to be able to afford life’s basic necessities like food, shelter and clothing), and therefore not have to rely on government assistance like welfare or food stamps. In turn, with this surplus of money due to a higher minimum wage, these workers can circulate more money into the economy by buying things they couldn’t have bought previously.[11] The classic argument against this is that if the minimum wage is too high in a certain area, employers will either outsource the jobs (or, more recently, turn to automation), or they will keep the employees at the higher wages but end up passing those higher bills onto consumers.[12] One other thing that critics of the view that the minimum wage will lead to more money for the working poor is that a large percentage (numbers vary, but most of the estimates are around 40%) of minimum wage workers are not in poverty or even close to it.[13] Many minimum wage earners are actually secondary income earners, like the spouse of a high-income earner, or the teenage kid who works a job after school for spending money.[14] It is these non-poor minimum wage earners that complicate things, as any minimum wage increase intended to help the working poor would also help these secondary income earners, while the possible job cuts associated with the higher minimum wage would affect both groups as well. So while raising the minimum wage would help most of the minimum wage workers, some need more help than others, and some may actually be hurt if employers believe that they cannot afford to pay that employee at a higher wage.

The two leading economists who have contributed the most to the minimum wage literature in American Academia are David Neuwark and Arin Dube, from UC-Irvine and UMass Amherst, respectively.[15] They have both looked at the “elasticities” of the relationship between raising the minimum wage and the amount of people in poverty. For example, if a state raises the minimum wage by 10%, and this results in a 2.4% reduction of the amount of people in poverty, then there is a -0.24 elasticity.[16] Neuwark and Dube have somewhat conflicting data on how much of a negative relationship (or elasticity) there is between raising the minimum wage and reducing poverty.[17] Neuwark believes that the job losses, although minimal, effectively cancel out the small benefit of the increased wages those members of the working poor that do keep their jobs.[18] Dube, who has more recent studies on the matter, as well as having reviewed many more studies (as minimum wage increases by states are a fairly new phenomenon) believes that there is a great deal of benefit to the working poor for raising the minimum wage.[19] However, this does not mean Dube wholeheartedly endorses an extreme increase in the minimum wage. Dube believes that a steady increase in the minimum wage is in order to combat poverty and inequality, but not so much that it hurts businesses and corporations.[20]

Both Dube and Neuwark agree that there are more effective ways of reducing poverty by only targeting those who both earn the minimum wage and are in poverty. They (and other economists) agree that an earned income tax credit would help the working poor by reducing their taxes.[21][22] This is both beneficial to the government and to the working poor, as the government does not have to collect this tax, which means that the members of the working poor have a higher economic gain, and with that, they can pull themselves out of poverty and end up not having to take as much government assistance, if any at all.

We do not know specifically how much of an increase in the minimum wage in Arizona due to Proposition 206 will help the state’s working class. And while it is true that there are negative effects to increasing the minimum wage, it is also true that there will be some benefit to some of Arizona’s poorest workers, some of whom, because of the state’s poverty rate, are themselves in poverty (I should also note that there is currently a legal challenge to the proposition that will be before the Arizona Supreme Court early in 2017, but regardless of the decision, the new law will take effect on January 1^st).[23] While Arizona still has a lot to do in order to become a more fair state for workers and helping its poorest individuals and families, Proposition 206 seems like a good start in helping fix some of these problems.

[1] Arizona Minimum Wage and Paid Time Off, Proposition 206 (2016), Ballotpedia (Dec. 30, 2016, 12:30 PM), https://ballotpedia.org/Arizona_Minimum_Wage_and_Paid_Time_Off,_Proposition_206_(2016).

[2] Id.

[3] Id.

[4] Ariz. Rev. Stat. Ann. §23-363 (2017).

[5] Arizona Minimum Wage and Paid Time Off, Proposition 206 (2016), Ballotpedia (Dec. 30, 2016, 12:30 PM), https://ballotpedia.org/Arizona_Minimum_Wage_and_Paid_Time_Off,_Proposition_206_(2016).

[6] Allie Bice, Poverty Rates in Arizona Still Among Nation’s Highest, AZCentral (Dec. 30, 2016, 12:31 PM), http://www.azcentral.com/story/money/business/economy/2016/09/16/poverty-rates-arizona-still-among-nations-highest/90495336/.

[7] Id.

[8] Poverty Thresholds, U.S. Census Bureau (Dec. 31, 2016, 4:34 PM), https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-poverty-thresholds.html

[9] Id.

[10] William P. Quigley, ‘A Fair Day’s Pay for a Fair Day’s Work’: Time to Raise the Minimum Wage, 27 St. Mary’s L.J. 513, 516 (1996).

[11] Rachel Harvey, Labor Law: Challenges to the Living Wage Movement: Obstacles in a Path to Economic Justice, 14 U. Fla. J.L. & Pub. Pol’y 229, 231 (2003).

[12] David Neumark & William Wascher, Minimum Wages and Low Wage Workers: How Well does Reality Match the Rhetoric, 92 Minn. L. Rev. 1296, 1298 (2008).

 

[13] Id. at 1312

[14] Id.

[15] Mike Konczal, Economists Agree: Raising the Minimum Wage Reduces Poverty, The Washington Post (Jan. 4, 2014), https://www.washingtonpost.com/news/wonk/wp/2014/01/04/economists-agree-raising-the-minimum-wage-reduces-poverty/?utm_term=.0810da6d7f7d#comments

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Neumark, supra, at 1312.

[23] Arizona Minimum Wage and Paid Time Off, Proposition 206 (2016), Ballotpedia (Dec. 30, 2016, 12:30 PM), https://ballotpedia.org/Arizona_Minimum_Wage_and_Paid_Time_Off,_Proposition_206_(2016).