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The "Poverty Trap" and Living Wage Laws

Metropolitan Legal Services, LLC

Aaron Yelowitz

University of Kentucky

Andre Neveu

Employment Policies Institute, City University of New York

Advocates of living wage laws claim wage mandates will help families escape poverty by increasing family earnings beyond the poverty line. This article examines such programs and the effect a change in pay would have on taxes and benefits for low-income families in cities where living wage laws have been enacted or considered. Many families living with earnings below the poverty line take advantage of programs specifically designed to help them out of poverty. Phase-out rates of benefit programs are structured so that additional earnings from living wages largely disappear through benefit reduction and increased taxation. The living wage appears to be badly targeted and ineffective at raising comprehensive disposable income. Such vanishing benefits reduce the ability of living wage laws to reduce poverty. Nearly 75% of those affected by the living wage were not initially in poverty, and more than 40% had initial incomes at least twice the poverty line.

Key Words: poverty • living wage • employment • marginal tax rates • low income • transfer programs • welfare

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