A better solution to the minimum-wage debate
Author: Michael Saltsman
Publication Date: September 2014
Newspaper: Crain's Chicago Business
This fall, Illinois voters will consider a nonbinding referendum on whether to raise the state’s minimum wage to $10 an hour from its current $8.25. Chicago Mayor Rahm Emanuel has asked whether an even higher city-specific minimum wage would also be appropriate.
Both the state and the city are posing the wrong question.
Illinois policymakers and voters shouldn’t be talking about whether to raise the minimum wage — they should be talking about the best way to boost the pay of low-income employees. On this count, the evidence suggests an increase in the Earned Income Tax Credit is far superior to an increase in the base wage.
Though it might seem counterintuitive, the minimum wage has a dismal track record of reducing poverty. Between 2003 and 2007, 28 states (including Illinois) increased their minimum wage in an attempt to alleviate poverty. Economists from Cornell and American University examined data from these states in a 2010 study, and found no evidence that the wage hikes had accomplished their stated goal.
They identified a few reasons for this paradox. For starters, a majority of individuals living in poverty — nearly 60 percent, according to the most recent Census Bureau numbers — don’t work and thus can’t benefit from a higher minimum wage.
Of those who do earn the minimum wage and would be covered by the new amount, very few live in poor households. Most are second or even third earners, with an average family income of $54,000 per year.
The other drawback with using the minimum wage to reduce poverty — a drawback discussed extensively in this newspaper and others — is that some less-skilled or less-experienced employees will lose job opportunities. Instead of being pulled out of poverty, they’ll be pushed further into it.
Fortunately, there’s a better alternative for poverty reduction in the form of the EITC — a tax credit that boost wages through the tax code instead of an unworkable mandate on employers.
It’s already doing a tremendous amount of good in Illinois. Currently, a single parent working part-time for the state minimum wage receives approximately $3,300 in EITC income from the federal government, and then Illinois’ state credit kicks in an additional $330. That makes their effective minimum wage roughly $10.60 an hour — even higher than the $10 figure voters will consider in the fall.
To boost this figure even further, Illinois could follow in the footsteps of states like New York, New Jersey, and Connecticut by expanding the size of its state EITC. Expanding the current 10 percent figure to match the 20 percent benefit available in a state like New Jersey would add more than $300 to the take-home pay of the parent described above.
Economic research supports the EITC as a better poverty-reducing alternative than the minimum wage. Economic research from the University of Georgia found that an expansion in the EITC was associated with a boost in earnings and employment for single mothers. (Meanwhile, a minimum wage increase was found to put a job further out of reach.)
Some critics argue that the EITC is just a government subsidy that allows employers to pay lower wages. But this argument has it backward. Many entry-level jobs wouldn’t exist if the minimum wage were set to $10 or $13 an hour. The EITC provides substantial income support without the devastating side effects of a minimum wage increase.
Expanding a tax credit might not play as well on the campaign trail as raising the minimum wage. But a partial subsidy to encourage work is far more preferable for Illinois to a 100 percent subsidy for an employee who can’t get hired.