EITC vs. Minimum Wage: Where Should Advocates Place Their Bets?

Original Article:

  • Author: Michael Saltsman

  • Publication Date: January 2011

  • Newspaper: Spotlight on Poverty

  • Topics: Living Wage

The best way to lift people out of poverty is to help businesses grow and create jobs. But while a rising tide of economic prosperity can reduce poverty, it won’t end it. There’s general agreement that government has a role to play in helping the less fortunate. But it should do so with an eye to minimizing unintended consequences—which is why it’s time to reevaluate the minimum wage.

Increases to the minimum wage are not well-targeted to low-income families. They result in job losses for employees lacking in experience and – worst of all – they provide a false sense of accomplishment with regard to the hard work of poverty reduction. Instead of focusing on the minimum wage, policymakers should focus on what we know works well, the Earned Income Tax Credit (EITC).

Economists already know that this is a better tack. A 2007 study by the University of New Hampshire found that seven out of 10 economists agree that the EITC is the best antipoverty program available to us, while only one out of 10 said the same thing about minimum wage hikes.

Unfortunately, few public policies enjoy wider popular support than increases in the minimum wage. Recent polling from Opinion Research Corporation shows that 70 percent of the public would support an increase.

Why are economists so much more skeptical than the public? Contrary to conventional wisdom, minimum wage increases aren’t effective at alleviating poverty.

This was demonstrated most recently in a 2010 study from economists at the University of Alabama and East Carolina University. Analyzing Census Bureau data, they found that 85 percent of low-income families received no benefit from the most recent federal minimum wage increase—specifically, because these families “do not contain a low-wage worker.”

An award-winning study published last year in the Southern Economic Journal reached a similar conclusion in its analysis of President Obama’s proposed $9.50 minimum wage, finding that only 10.9 percent of the benefits of such a wage hike would go to the working poor.

This research provides important context for the claim – often made by advocates of minimum wage policy – that three-quarters of minimum wage-earners are adults. This statistic gives the misleading impression that impoverished adults are the primary earners of the minimum wage. Simply put, this is untrue. According to data from the Census Bureau, nearly 40 percent of the beneficiaries from the last federal minimum wage increase were living at home with a parent or another relative (a group comprised mostly of 16- to 19-year-olds).

Much of the remainder was comprised of second or third earners in families living well above the poverty level—the average family income of someone making the minimum wage in 2009 was $47,023. In fact, single parents with children represented only one in five beneficiaries of the federal minimum wage increase.

And it’s not even clear that an increase in the minimum wage would be a net benefit for that one in five.

One of the unintended consequences of minimum wage increases is a reduction in employment among low-skilled workers. A comprehensive survey of two decades of studies on the minimum wage has revealed that 85 percent of the best studies on the subject point to job losses following federal and state increases in the minimum wage.

The consequences are particularly bad for less-educated single mothers, arguably the most important of impoverished individuals to target. For this cohort, research shows each 10 percent increase in the minimum wage is associated with a six percent reduction in employment.

Fortunately, there are better-targeted policies with fewer unintended consequences, like the EITC. University of Alabama and East Carolina University economists have found that that 2.5 times more Americans would have been lifted out of poverty if there had been an expansion of the federal EITC between 2007 and 2009 instead of an increase to the minimum wage. Additional research shows that every 10 percent increase in a state’s EITC supplement is associated with a one to 1.5 percent increase in employment for single mothers.

Instead of fumbling around with misguided proposals to increase or index the minimum wage in 2011, perhaps now is a good time for states to consider the introduction or expansion of their EITC supplement, such as those in 23 states and the District of Columbia.

An effective poverty reduction strategy is one that redistributes income to target groups while minimizing unintended consequences—all of which the EITC does, and the minimum wage does not.

Michael Saltsman is a research fellow at the Employment Policies Institute.