Expand tax credit instead of raising the wage

  • Michael Saltsman

    Michael Saltsman

 
By Michael Saltsman

In an "emergency session" earlier this month, a majority of Chicago's aldermen voted to raise the municipal wage to $13 by 2019.

The pressure now moves to Springfield, where state legislators are considering whether to follow suit with a smaller hike before year's end. But there's a better path to reducing poverty that will be less harmful to the state's already-struggling businesses: an expansion of the Earned Income Tax Credit.

The EITC supplements the paychecks of lower-paid employees via the tax code rather than a mandate on small business. In this way, it overcomes many of the problems and unintended consequences associated with raising the minimum wage.

For instance, the economic evidence suggests that raising the minimum wage is not an effective anti-poverty policy measure. Economists from American and Cornell universities studied the effects of 28 state minimum wage increases (including Illinois') that took place between 2003 and 2007 and found no associated reduction in poverty.

There are several reasons for this counterintuitive finding. First, Census Bureau data show that nearly 60 percent of working-age poor in this country don't work and thus are not affected by a wage hike. They need a job, not a raise.

Second, the minimum wage is not well-targeted to poor households. In Illinois, for instance, the average family income of a minimum wage earner affected by a $10 minimum wage is over $60,000 per year. That's because minimum wage workers are often the second or third earners in their home. (Fewer than 10 percent are single parents.)

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If targeting were the only drawback to a wage hike, it might still be worthwhile policy option. Unfortunately, raising the minimum wage also reduces job opportunities -- no small concern in a state where nearly one-quarter of job-seeking teens still can't find work.

When labor costs rise with minimum wage, low-margin businesses must either scale back employee hours or raise prices in order to maintain their slim profits. Raising prices in this competitive economy often isn't an option, so employers must absorb these increased costs by reducing job opportunities in favor of self-service alternatives which is becoming ever easier with the spread of new technology.

In fact, the overwhelming majority of economic research -- including 85 percent of the best studies since the early 1990s -- conclude that wage hikes cost jobs. And because minimum wage jobs are mostly held by low-skilled and entry-level employees, this job loss disproportionately hurts people who need these jobs most.

Fortunately, the EITC overcomes these failures. It targets those in poor households, not low-wage earners in middle-class households. Importantly, it rewards work rather than eliminates it, which is why it enjoys support across the political spectrum.

                                                                                                                                                                                                                       
 

It's already doing a tremendous amount of good in Illinois. At the moment, a single mother working part-time for the state minimum wage receives approximately $3,300 in EITC income from the federal government. Illinois' state credit kicks in an additional $330. That means her effective minimum wage increases to roughly $10.60 an hour -- even higher than the nonbinding $10 figure that voters approved on Election Day.

Recognizing the benefits of the EITC, states like New York, New Jersey and Connecticut have expanded their programs. Rep. Paul Ryan has proposed expanding it nationwide for childless adults. Illinois legislators should follow suit and implement such proposals. Expanding the EITC would mend a hole in the social safety net without jeopardizing jobs, something voters of all stripes can agree on.

• Michael Saltsman is research director at the Washington, D.C.-based Employment Policies Institute, which receives support from businesses, foundations and individuals.

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