CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press David Brooks Stumbles Over the Work Force in Attacking the Minimum Wage

David Brooks Stumbles Over the Work Force in Attacking the Minimum Wage

Print
Friday, 21 February 2014 05:51

David Brooks doesn't like the idea of raising the minimum wage. But the good news is that he thinks it's a good idea to increase the Earned Income Tax Credit (EITC), an alternative mechanism for helping low-paid workers.

In criticizing President Obama's proposal for raising the minimum wage, Brooks refers to the Congressional Budget Office's (CBO) projection that it would lead to 500,000 fewer jobs, but doesn't get the story quite right:

"Democrats embrace a raise in the minimum wage that could drive another half-million workers out of the labor market."

Actually CBO projected that the higher minimum wage would lead to 500,000 fewer jobs, not drive 500,000 people out of the labor market. This isn't just nitpicking.

Some folks may recall CBO's analysis of the ACA. This concluded that the ACA would reduce the supply of labor by roughly 2 percent. That was a case where people would be leaving the labor force or reducing their supply of labor. The issue here was that the ACA made it possible to get health insurance outside of employment. This would mean that many near retirees or people in bad health might decide to quit their jobs or work fewer hours as a result. Many parents of young children may also decide to work fewer hours or take time off from work to be with their kids.

Opponents of the ACA jumped on the CBO analysis. Some wrongly claimed that CBO concluded the ACA will kill jobs. More informed critics decried the negative incentives for work created by the ACA. And this is partly true. The ACA provides substantial health care subsidies for low and moderate income workers that are phased out as income rises. This phase out is equivalent to a higher tax rate.

For example, if a $4,000 subsidy is phased out as income rises by $20,000, this is equivalent to a 20 percent marginal tax rate. This provides a disincentive to work. (You get to keep 20 cents less of each dollar you earn.) There is reason for thinking the effect of this disincentive is small, but it nonetheless exists.

Now let's get back to David Brooks support for a higher EITC as an alternative to raising the minimum wage. President Obama wants to raise the minimum wage by $2.85 over three years. This would put another $5,700 in the pockets of a full-time full-year worker.

Suppose that we agreed with Brooks and said this is the wrong way to go, instead we will be clever conservatives and give workers the equivalent increase in income through the EITC. Currently, the EITC peaks at a bit under $5,500 for a single person with two kids. This credit is phased out at a rate of 21 cents on the dollar for income above $18,000. This means that for every $1,000 earned above $18,000, workers will lose $210 of their tax credit. This means that the credit falls to zero at an income level around $44,000.

After being convinced by David Brooks that a higher EITC is the better route to go than raising the minimum wage, we decide to raise the maximum EITC by $5,700 a year. This puts the maximum a bit under $11,200. Now we have a little arithmetic problem. Currently we phase out the EITC over roughly a $26,000 income range (from $18,000 to $44,000). If we phase out a $11,200 credit over the same range, then we would need to take back 42 cents of every additional dollar earned ($420 out of every $1,000). This would be a very large increase in the marginal tax rate faced by moderate income workers, giving them a much larger disincentive to work. Is this what David Brooks and his fellow conservatives want?

Alternatively, we could keep the same rate of phase out, but then we would have people earning almost $70,000 a year getting the EITC. That's a pretty expensive alternative to raising the minimum wage.

Of course we could do a mix of a higher tax rate and a higher peak income level, but that still gives us some serious work disincentives and an expensive EITC. There is no way around this problem. Of course we also have the problem of fraud for which David Brooks' plan would provide considerable incentive. Suppose the government gives you $11,200 if you claim that you earned $12,000 last year. There would be a strong incentive for people who are not working to get a friend or family member to say they paid them $12,000 last year to clean their house or take care of their yard.

Conservatives tend to exaggerate the amount of fraud associated with the EITC, but the level is not zero. If the EITC is doubled then the incentive for fraud is increased proportionately. 

As a practical matter, if we were actually debating a large increase in the EITC it is likely that David Brooks' conservative friends, if not Brooks himself, would be raising these concerns about the disincentives to work and the incentives for fraud. But, as long as the higher EITC is just being thrown out as a reason not to raise the minimum wage, these issues won't get into the debate. But that's the service we provide at Beat the Press. 

 

Typos corrected -- thanks Robert Salzberg.

 

Comments (13)Add Comment
Brooks and his pals don't want any increase to poor incomes.
written by Michiganmitch, February 21, 2014 6:33
Watch out for those moving goalposts!
...
written by watermelonpunch, February 21, 2014 6:57
Well of course he would never want it to be the employer's responsibility to actually pay people what their work is worth in today's world. When it comes to the government dole, it's about subsidizing big business.
Republicans Born Yesterday Discover Truly Needy and Broken Labor Market
written by Last Mover, February 21, 2014 7:01
Instead, Republicans need to declare a truce on the social safety net. They need to assure the country that the net will always be there for the truly needy. Then they need to point out that it is the web of middle-class entitlements, even the home mortgage deduction, that really threaten benefits to the poor.
The big new problem, Brooks writes, is that labor markets are sick. Fewer people are working and enjoying the sense of reward that is a key to happiness. Democrats embrace a raise in the minimum wage that could drive another half-million workers out of the labor market.


What a sop to unearned gains of the rich, by one who just learned the "big new problem" is labor markets are not working. So to maintain zero upward mobility, a mortgage tax break for the middle class is said to threaten the poor below them, so the poor need an EITC tax break instead of minimum wage increase to have a chance at entering the middle class above them?

BTW, this is Arthur Brooks of AEI talking, not David Brooks.
Furthermore, watermelonpunch...
written by ifthethunderdontgetya™³²®©, February 21, 2014 8:17
.
David Brooks does not want people to be paid what they're worth, period. If they were, he'd be broke.
~
"CBO projected that the higher minimum wage would lead to 500,000 fewer jobs"
written by Bill H, February 21, 2014 9:14
Oh please. Read the report. That is NOT what it said.

It siad there is a one-third chance that it will have no effect on jobs. There is a two-thirds chance that it will cost between only a few jobs and one million jobs.

If you want to arrive at an average of that projection, which is a silly way to summarize the report, it would cost 333,333 jobs, not 500,000, because you have to include the one-third chance that it will have no effect.

But logic does not permit averaging the extremes of a projection and claiming that it represents a valid projection of the eventual outcome. The eventual outcome remains unknown and can only be guessed at and assumed to be between the two extremes provided.
...
written by Kat, February 21, 2014 11:45
Maybe those jobs that it costs shouldn't exist? I mean if another few dollars an hour to the employees is going to send them over the edge, maybe they're not viable businesses anyway?
Walmart wants MinWage Hike
written by jonny bakho, February 21, 2014 11:52
Walmart wants the MinWage to go up because their customers would have more to spend. They might have to raise some wages, but so would their competitors.

The Fed has been falling short of its inflation target, in part because No Wage Inflation. MinWage might help the Fed meet its target.
If he only had a brain ...
written by Squeezed Turnip, February 21, 2014 1:41
David Brooks, wizard of loss (yet actually only a carnie), says the straw man has a brain, but not until the straw man defeats the wicked witch of the west, aka labor market corrections. So we know his balloon is full of hot air.
Reading the report DOES show the 500K figure
written by John Wright, February 21, 2014 7:39
Bill H encouraged reading of the report apparently to counter the 500K number as inaccurate.

"CBO projected that the higher minimum wage would lead to 500,000 fewer jobs"
written by Bill H, February 21, 2014 10:14
"Oh please. Read the report. That is NOT what it said."

So I did:

Page 5 of the report it has:
"Effects of the $10.10 Option on Employment and
Income. Once fully implemented in the second half of
2016, the $10.10 option would reduce total employment
by about 500,000 workers, or 0.3 percent, CBO projects."

On page 13 of the report has:

"Effects of the Options on Employment According to CBO’s central estimate, implementing the $10.10 option would reduce employment by roughly 500,000 workers in the second half of 2016, relative to what would happen under current law."

Admittedly, the round 500K number sure appears "pulled out of the air", and may be the CBO's calculated expected value given by multiplying the probabilities x the estimated job loss for each probability and summing.

But for media consumption, the CBO would likely expect a single number, their "central estimate" of 500K would be picked up for mass consumption.

The 500K figure is there for the media, and others, to view.

But losing these jobs may not be bad for the American workforce.

What do you say to the guy who loses his job?
written by Capt. J Parker, February 22, 2014 12:25
So, it seems like stalwart progressiver are sticking with a minimum wage hike no matter what? What will you tell someone that's unemployed because of the minimum wage hike? Is it one of these?:
1) Hey, be happy for the lucky few still working and are now making more than you used to.
2) Be glad the Iraq war wasn't what put you out of work.
3) It could have been worse. You might have faced work disincentives from that awful Joe Brooks plan.
4) You weren't supposed to have that job for very long anyway.
5) Relax, you're only unemployed. It's not like you were driven out of the labor market. There's a difference you know.
6) Losing a job like yours may not be bad for the american workforce.
7) Be happy for Janet Yellen. She can now meet her inflation target more easily
8) Because of the probabilities stated in the CBO report, the reason for your job loss is unknowable.

...
written by Ron Alley, February 22, 2014 7:54
For example, if a $4,000 subsidy is phased out as income rises by $20,000, this is equivalent to a 20 percent marginal tax rate. This provides a disincentive to work. (You get to keep 20 cents less of each dollar you earn.) There is reason for thinking the effect of this disincentive is small, but it nonetheless exists.


Economists seem so fascinated by their notion of disincentive to work. It seems to me that you fail profoundly to understand that incentive is so powerful that it beats disincentive in almost all circumstances.

If disincentive is such a powerful force, why do we have such inequality? Why do the 1%, the 5% and the 10% continue to work so hard to succeed even though they bear the burden such a great burden of taxes?
Captain, oh my Captain
written by Squeezed Turnip, February 22, 2014 2:21
Captain Parker, when was the last time you spoke to an unemployed person? Your feigned concern for the unemployed would be better spent on those who are now unemployed thanks to the failings of "conservative" policies.
When you've lost the debate - change the subject.
written by Capt. J Parker, February 22, 2014 11:12
So, tell me, turnip, how DOES the leftist obsession with a min wage hike show concern for the unemployed? BTW. I score conservative policy this way:
ARRA = 9% unemployment
2013 sequester = 3.2% Q4 GDP growth

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.

busy
 

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

Archives