The $9 Minimum Wage That Already Exists

Original Article:

  • Author: Michael Saltsman

  • Publication Date: February 2013

  • Newspaper: Wall Street Journal

  • Topics: Minimum Wage

On Tuesday night, President Obama used his State of the Union address to call for a 24% increase in the federal minimum wage, to $9 an hour from its current $7.25. He left out an important detail: For many low-wage employees, single parents in particular, the minimum wage is already above $9 an hour.

That is because of the Earned Income Tax Credit, which boosts wages for workers at the bottom of the pay scale without putting their jobs or incomes at risk—which is one consequence of hiking the minimum wage. If Mr. Obama is dead set on using the government to boost wages, the EITC is the place to start, as the evidence suggests that minimum wage increases have no appreciable impact on poverty.

The EITC was created in 1975 by President Ford as a small wage supplement for low-income families. Subsequent presidents of both parties (including President Obama in 2009) have expanded the tax credit, and 24 states even offer a credit of their own as a percentage of the federal credit.

Republicans have supported this tax credit because eligibility is based on working and earning income. Democrats hail the EITC because it’s refundable, meaning that a low-wage family without any tax liability nevertheless can file a tax return and get a check from the government. In a state such as New York, a single parent raising two children on the minimum wage would see their annual wage of $15,080 jump to $21,886 with the EITC, for an effective hourly wage of $10.52.

Compared with the EITC, government-mandated minimum wage increases have major flaws. One is targeting: According to the Census Bureau, 60% of people living below the poverty line didn’t work last year. They don’t need a raise; they need a job, period. And among those who do work and earn the minimum wage, researchers at Cornell and American University have found that the vast majority live in households above the poverty line.

This partially explains why numerous studies have found no relationship between a higher minimum wage and lower poverty rates—because, unlike the EITC, the benefits generally aren’t accruing to those in poverty.

Another reason a higher minimum wage doesn’t reduce poverty rates is that a hike in hourly pay doesn’t necessarily translate to an annual income bump. If employers faced with suddenly higher labor costs reduce hours or employment, take-home pay will decline. Economists writing in the Journal of Human Resources in 2005 found that to be the case, with the “losers” from a higher minimum wage—who moved closer to the poverty line after the policy was passed—outnumbering the winners.

The EITC has a very different research track record. In a study published by the Employment Policies Institute last year, economists Joseph Sabia at San Diego State University and Robert Nielsen at the University of Georgia found a 1% drop in state poverty rates associated with each 1% increase in a state’s EITC. A 2007 study by Mr. Sabia found that a higher Earned Income Tax Credit can boost the wages and employment of single mothers. But the employment of single mothers dropped by 6% for each 10% hike in the minimum wage.

The president can choose to expand or improve the Earned Income Tax Credit and thus have a measurable impact on poverty rates. Or he can hike the minimum wage. This might win him support among his labor-union allies. It won’t do any good for the low-income unemployed, and it will add to their numbers.

Mr. Saltsman is research director at the Employment Policies Institute.