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Minimum Wage Proposal an Essential Step Toward Making Work Pay

Critics of President Obama’s proposal to raise the minimum wage modestly so that it reaches $9 an hour in 2015 say the Earned Income Tax Credit (EITC) is a better way to supplement low wages.  But, both a more adequate minimum wage and strong refundable tax credits are necessary to “make work pay.”

CBPP has worked on EITC and minimum-wage issues for nearly three decades.  In the 1990s, we termed them the twin pillars of an effective make-work-pay strategy.  This remains the case today.

To lift working families’ incomes to an adequate level through the minimum wage alone, policymakers would have to raise it far above its historical level — and to a level that could raise significant concern about the effect on jobs.

Similarly, if policymakers tried to do the job solely through refundable tax credits, the cost to the government would be well beyond what they likely would countenance.  Also, low-income workers would get too large a share of their income once a year at tax time, rather than throughout the year in their paychecks.

Working together, however, a decent minimum wage and strong refundable credits can help low-wage workers make ends meet and ensure that those considering whether to work have a strong incentive to take a job.

Unfortunately, the minimum-wage pillar of that strategy isn’t doing its job today.  Policymakers let the wage erode substantially, especially in the 1980s, and subsequent updates haven’t restored that loss.  At $7.25 an hour in 2013, the minimum wage is 21 percent below its 1968 level, after adjusting for inflation.

Raising the minimum wage to $9.00 an hour by 2015, when the economy should be stronger, would restore much of the loss in its purchasing power.  And indexing the minimum wage for inflation going forward — a critical part of the President’s proposal — would prevent it from eroding again in the future.

One important additional step would still be needed.  While refundable credits for low-income workers are strong for families with children, the EITC for workers without children is miniscule.  It’s so small, in fact, that single workers without children remain the one group of Americans who begin to owe federal income tax when their income is still below the poverty line.  In other words, the income tax pushes them deeper into poverty.

These workers received some relief over the past four years, first from the 2009 Recovery Act’s Making Work Pay tax credit and then from the payroll tax cut enacted in 2010.  But both measures have expired.  Some leading researchers have suggested that a stronger EITC for workers without children would not only help these workers but would likely induce more poor single individuals to enter the labor force, as research shows the EITC does with poor single parents.

We may have to wait for another day for policymakers to address the inadequacy of the childless workers’ EITC.  But the President’s minimum-wage proposal advances the effort to restore the minimum-wage pillar.  It is now up to Congress to move on this.