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Strengthen Minimum Wage - and EITC

May 27, 2015 at 3:45 PM

A range of proposals related to the minimum wage and Earned Income Tax Credit (EITC) have emerged in recent weeks, including a congressional proposal to restore the minimum wage to about half of the median wage and Warren Buffett’s call for a major EITC expansion.  They share the laudable goal of assisting the millions of low-wage workers and their families who struggle to make ends meet.  But often, discussion of such proposals focuses on one policy at the expense of the other, implying (or saying) that just a larger EITC or a higher minimum wage can address the need. 

This view is mistaken.  As we and others have long pointed out, the two policies are strongly complementary, at both the federal and state levels.  Neither is sufficient by itself.

These policies reflect a balanced combination, with each helping fill gaps the other can’t adequately address on its own.  For example:

  • The EITC adjusts to reflect family size and income, while the minimum wage can’t (and shouldn’t). 
  • The EITC encourages more people to seek jobs in the low-wage sector, which may put modest downward pressure on the wages that some employers offer potential workers.  By establishing a wage floor, a higher minimum wage counters that effect. 
  • The EITC provides a wage supplement in the form of a tax refund that comes once a year and can be used for large, one-time expenses such as repairing a roof or car or paying a security deposit. The minimum wage is reflected in every paycheck, helping families meet routine bills as they arise.

Also, policymakers are extremely unlikely to expand either policy so dramatically that it would, by itself, boost families’ incomes enough to fully cover basic needs.  The costs of an EITC expansion that large, and concerns regarding the employment effects of a minimum wage that high, would almost certainly keep policymakers from relying solely on only one of these policy levers to achieve adequate standards of living. 

Instead, both vital policies need strengthening.  The current minimum wage is far from sufficient, having fallen well below its historical value relative both to inflation and to what the typical worker earns.  The minimum wage now equals just 37 percent of the median wage; by contrast, it equaled about half the median wage in the 1960s.  

On the EITC side, one immediate priority is making permanent key provisions of the EITC and related Child Tax Credit scheduled to expire at the end of 2017.  Failure to do so would push some 16 million people in working families with modest incomes — including 8 million children — into or deeper into poverty.  Policymakers also need to plug the big hole in the EITC for childless adults and non-custodial parents; their EITC is so meager that the federal tax system taxes 7 million such workers into or deeper into poverty.

The International Monetary Fund is among those who have recognized the complementary nature of the minimum wage and the EITC and urged action to strengthen both.  As a 2014 IMF report put it:

An expansion of the EITC (including making permanent the various extensions that are due to expire in 2017) would also raise living standards for the very poor.  Finally, given its current low level, the minimum wage should be increased.  This would help raise incomes for millions of working poor and would have strong complementarities with the suggested improvements in the EITC, working in tandem to ensure a meaningful increase in after-tax earnings for the nation’s poorest households. 

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