Conservatives want taxpayers to subsidize low-wage employers

There is nothing new about the push by conservatives like Rep. Paul RyanPaul RyanHouse Democrat sit-in: well intended but in the wrong well Trump up, Obama down after shocking Brexit vote Republican chairman: Our tax reform plan fits with Trump's vision MORE (R-Wis.) to increase the Earned Income Tax Credit as an alternative to raising wages. Indeed, every time momentum starts to build for raising the minimum wage, opponents suggest expanding the EITC instead.

The EITC is an effective means of reducing poverty for low-wage working families, so let’s hope Congress acts to increase it. But it would be wrong to see the minimum wage and the EITC as competing with each other.

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Opponents of raising the minimum wage like to say that the EITC boosts take-home pay. It does no such thing. Pay is what you earn from your employer for working hard and helping the business succeed. The EITC is a tax-payer financed subsidy that enables some employers to pay wages so low that workers are forced into poverty.

In fact, the EITC helps employers who pay low wages in another way as well. The supplement to workers’ pay acts as an incentive for more workers to be willing to take low wage jobs. That increases the labor supply and drives down the wages of low-paid workers. University of California economist Jesse Rothstein estimates that on average, an additional dollar spent on the EITC raises a low-wage worker’s income by only 73 cents. The rest is captured by employers now able to pay lower wages.

These two policies – EITC and minimum wage increase - work best together to reduce poverty. As the Congressional Budget Office (CBO) noted, increasing the minimum wage offsets the negative effect of the EITC on the wages of low-wage workers and assures that they get a full dollar of benefit for every dollar taxpayers spend on the subsidy. The CBO estimates that increasing the minimum wage to $10.10 an hour will itself lift 900,000 people out of poverty. Other research suggests that such a move will reduce the poverty ranks by more than 4.5 million people.

An increase in the minimum wage will lift the income of millions of low- and moderate-income working families. More than 16 million workers earning between the current minimum wage of $7.25 and $10.10 will get a raise. In contrast to the claims of opponents, the CBO finds that only 12 percent of the workers who benefit are teenagers. More than half are employed full-time, and the majority are women. Another 8 million workers earning just above $10.10 an hour would likely also see their wages increase.

More than two decades of empirical research finds that increases in the minimum wage in the U.S. have had virtually zero effect on employment. A rigorous meta-analysis of more than 200 scholarly publications published since 1991 found that “negative effects on employment resulting from increases in the minimum wage were too small to be statistically detectable.” Only a handful of studies find that increases in the minimum wage have negative effects on employment.

In the appendix to its report, the Congressional Budget Office came up with a job loss figure by choosing to split the difference between the overwhelming evidence that the effect on employment is close to zero and the few studies that find a reduction in employment. This is not a good methodology and flies in the face of the most rigorous research to date. Opponents of the minimum wage have hyped the CBO’s mid-range job loss figure, but conveniently overlook the CBO’s finding that increasing the minimum wage will increase the incomes of low- and moderate-income families by $17 billion a year – money that generally goes right back into the economy.

The ill effects of poverty on families and children are well known. But it also impacts the economy. According to Princeton University economist Alan Blinder, “The U.S. is not doing nearly enough. Inequality is rising, and so is poverty—which takes a toll on the productivity of the American workforce.”

When it comes to the EITC and the minimum wage as policies to address rising poverty and inequality, the answer is not neither or either, but both.

Appelbaum is senior economist with the Center on Economic Policy and Research.

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