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Having Your Minimum Wage and EITC, Too

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Written by John Schmitt   
Tuesday, 08 January 2013 09:45

Economic commentator Evan Soltas really missed the boat in his most recent Bloomberg column on the minimum wage. He gets some of the economics right —the best empirical evidence on the minimum wage, he notes, for example, "find[s] small, if any, impacts of the minimum wage on employment." But, his analysis of the politics is badly misinformed.

Here is the way Soltas frames the politics around a minimum-wage bill sponsored by Democratic Senator Tom Harkin of Iowa:

"Liberal arguments for increasing the minimum wage have a fundamental flaw: They restrict the set of policy choices to either a minimum wage increase or doing nothing. That means they overlook the single most important federal policy for the poor: the Earned Income Tax Credit."

This is a terrible straw man. Liberals are, in fact, typically strong supporters of both the minimum wage and the EITC.

My CEPR colleague, Dean Baker —who Soltas links to in order to make his case that liberals have a "minimum wage or nothing" view— is, for example, a long-time supporter of both the minimum wage and the EITC.

More to the point, Sen. Harkin —whose proposal to increase the federal minimum wage from its current level of $7.25 per hour to $9.80 in 2014 was the impetus for Soltas's column— is also a strong advocate for the EITC. Less than a month ago, for example, The Hill described Harkin and his Senate colleague Chuck Schumer as "blasting" Republicans for allowing a recent expansion of the EITC to expire as part of the fiscal cliff negotiations. And here is a link to coverage of a press conference last summer, where Harkin was also defending the EITC against Republican cuts.

Soltas would have been much more accurate if he had described liberals as generally supporting both the minimum wage and the EITC, while many conservatives oppose both (despite the fondness that Ronald Reagan had for the EITC back in the day).

In addition to this serious misreading of the politics, the column also got a few things wrong on the economics.

First, the minimum wage and the EITC are, in practice, strong policy complements, not substitutes. (For a detailed discussion, see this report by Jeannette Wicks-Lim and Jeffrey Thompson for the Political Economy Research Institute.)

The EITC can help to raise the income of low-wage workers in low-income families, particularly those with children. But, because of the way it is structured, an unintended consequence of the EITC is that it can also drive down the wages of workers who aren't covered by the EITC or who are eligible, but fail to participate. The ultimate effect is to shift some of the benefits of the EITC to employers at the expense of their low-wage workers who aren't receiving the EITC.

The link to lower market wages is well-documented. As I summarized in a CEPR report last year:

"Since the EITC significantly raises the after-tax wages of many eligible low-wage workers, the EITC effectively raises the labor supply for eligible workers, which may act to lower the before-tax wages paid by employers. The EITC more than compensates recipients for any decline in the wage employers paid, but a large share of low-wage workers, especially those without children or in families with other adults in work, experience only the supply-induced reduction in the hourly wage because they are not eligible for the EITC (or receive much smaller payments). [Economist Jesse] Rothstein estimates that the net result of these gains and losses for different types of workers is that an additional dollar spent on the EITC only raises after-tax wages by about 73 cents. [Economist Andrew] Leigh concludes that 'a ten percent increase in the generosity of the EITC is associated with a five percent fall in the wages of high school dropouts and a two percent fall in the wages of those with only a high school diploma.'"

The EITC is a wage subsidy that benefits both participating workers and their employers. A higher EITC raises the after-tax wages of participating workers and acts as an indirect, but sizeable, subsidy to low-wage employers. In this context, a higher minimum wage lowers the share of total EITC expenditures that end up in the pockets of employers instead of low-wage workers.

Second, the minimum wage is not, as Soltas claims, "poorly targeted." Doug Hall and David Cooper of the Economic Policy Institute have documented that the vast majority of benefits (70.7 percent) of a minimum-wage increase to $9.80 would go to workers in low- and middle-income families (those with incomes below $60,000 per year). About 88 percent of beneficiaries are adults, 20 years or older.

A higher minimum wage is one of many important ways to reverse the three-decades-long increase in inequality. A more generous EITC is another. Doing both is better than doing neither or either.

Tags: EITC | employment | minimum wage

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