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IMF and OECD Call for Stronger EITC and Minimum Wage

July 30, 2014 at 11:42 AM

The Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF), which have previously recommended expanding the Earned Income Tax Credit (EITC) and raising the federal minimum wage, both issued recent reports underscoring that these measures should be viewed as complements, not competing alternatives.

The reminder that a higher minimum wage can make a stronger EITC more effective at reducing poverty and encouraging work is especially timely given House Budget Committee Chairman Paul Ryan’s new poverty plan.  Ryan commendably recommended expanding the EITC for childless workers and non-custodial parents, but presented this as an alternative to a minimum wage increase.

The IMF report recommends:

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.

The OECD working paper reiterates the OECD’s previous finding that “the EITC is a large and successful antipoverty program” and recommends strengthening the EITC for childless workers and non-custodial adults, along with raising the minimum wage.  Because the EITC is a proven work incentive, it expands the number of people seeking jobs in the low-wage sector, which can put some downward pressure on the wages that employers offer potential workers — meaning that some EITC dollars would effectively flow to employers, not workers.  A higher minimum wage helps offset that effect.  As the OECD explains:

Setting the federal minimum wage at a reasonable level can also help to make the EITC more effective at raising incomes. Although hard to quantify, employers could be capturing part of the credit by paying lower wages than they would in the absence of the EITC (OECD, 2009). Increasing the federal minimum wage would counteract this dead-weight loss by supporting wage levels.

For policymakers of either party striving to expand opportunity and raise the living standards of working-poor families, the policy roadmap is clear:  extend the recent improvements in the EITC and Child Tax Credit, expand the EITC for childless workers, and raise the minimum wage.