Dec. 01, 2016

Sometimes the minimum wage can be a poverty trap.

Most people think that working from an early age is a good way to avoid poverty. But maybe it's not true at all? Could work actually be a trap for poverty?

Prof. Miki MalulResearch conducted by Prof. Miki Malul (Guilford Glazer Faculty of Business and Management GGFBM Department of Public Policy and Administration), Prof. Israel Luski (Department of Economics) and Liran Koren, Ben-Gurion University of the Negev, examines how young people's career starting point influences their willingness to further their education and training. The study is called "Employment as a Poverty Trap" and was published in the Journal of Employment Counseling

Future earning ability involves effort and costs. 384 participants in the study were divided into two groups: Group A was asked to assume that they were not working, but that they could obtain a minimum wage. Group B was asked to assume that they were already working at minimum wage. 

Economically, participants in both groups were theoretically in the same situation before continuing studies. That is, were they to venture out to higher learning, might they lose the same potential salary. In fact, the non-working members of Group A lose alternative costs, while the working members of Group B lose direct cost - their existing salary - and therefore demand an excess premium. Such a situation is called the status quo bias, or an overvaluation of the status quo

Indeed, the results showed that in Group B, an increased future wage was required by about 4% to encourage the participants to go on for training. What effect does this have? Talented people understand that they will earn more and will be worth more than minimum wage if they continue their education, and are more willing to stop working to do so. On the other hand, unskilled people prefer to stay in their jobs. But the big difference was in the mid-level: among these, existing minimum wage could leave them in an inefficient lifelong cycle

Policy-wise, influencing such an understanding means that the government must act to keep young people out of poverty traps by increasing access to higher education, whether academic or professional. Thus, more people will realize their earning capacity, which will of course benefit their pocket - but will also contribute to the economy by contributing to the economy's output.

The Department of Public Policy and Administration is an integral part of the Guilford Glazer Faculty of Business and Management GGFBM at Ben-Gurion University of the Negev. As such, the Department emphasizes MA Degree management ​studies and the interface between the public sector and the business sector with the world of economics and business management. The Department provides academic and practical training infused with social responsibility and leadership. Grounded in management studies, our graduates enjoy a significant competitive advantage in the labor market, headed for leadership positions with invaluable impact on society.​