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© (L-R) Gordon Berlin, Heidi Shierholz, Joseph J. Sabia, and Harry Holzer

Minimum wage or earned income tax credit: Which helps the poor more?

February 28, 2014 10:00 AM

Currently, there are two mechanisms for increasing the wages of low-income Americans that have attracted attention in today’s political arena: the raising of the minimum wage to $10.10 and the expansion of the Earned Income Tax Credit (EITC). This past Monday, American Enterprise Institute (AEI) hosted a forum of experts who shared about the costs, benefits, and viability of these two primary solutions to assist low-income Americans. The presenters included Gordon Berlin, MDRC; Heidi Shierholz, Economic Policy Institute; Joseph J. Sabia, San Diego State University; and Harry Holzer, Georgetown University. The panel was moderated by Robert Doar from AEI.

The US poverty rate has risen to 15 percent, and more than 46.5 million Americans are living below the poverty line. In a slow-growth economy, low-income Americans are still struggling 56 months after the Great Recession technically ended.

In his State of the Union speech, President Obama said he would raise the minimum wage for federal contractors and called on Congress to raise the federal minimum wage. Others have offered an alternative policy change: enhancing the earned income tax credit.

Berlin opened by describing how EITC imposes significant penalties on those who are married, and how the credit provides little support to single workers or noncustodial parents. Currently, the EITC heavily favors custodial single parents. Proposals are on the table to expand the credit benefits to singles, the subject of a new MDRC research project in New York City. The pilot in New York City will feature a total of 6,000 participants, with 3,000 eligible to receive the expanded credit and 3,000 forming a control group. Berlin hopes the results will help influence a change at the national level, but admitted the $35 billion cost would be a hindrance to acceptance.

Shierholz examined the recent Congressional Budget Office report that studied the income and employment impacts of raising the minimum wage to either $9 or $10.10 per hour. She highlighted that the substantial income boost from the hike would benefit many low- and middle-class income households. Shierholz did take issue with the estimates suggesting a raise to $10.10 would cause an employment decline of 500,000 jobs. "What we need to remember is that minimum wage is not an anti-poverty tool, but a basic labor standard."

When asked which program would have a greater long-term impact on the national economy—assuming the MDRC program is made national and the minimum wage moved to $10.10—Shierholz replied: “An increase in the min wage to $10.10 and Gordon’s proposal sounded like they will shift roughly the same amount of money. The EITC would be more targeted to the very low income (whereas the min wage increase would go to low-and middle- income) person. A sizeable chunk of the EITC expenditures would be captured by low-wage employers if the min wage wasn’t increased. So I guess I’d say minimum wage and EITC is much preferred, but if I have to pick one, then we should start with minimum wage.”

Sabia noted that 16 percent of those benefiting from a wage raise live in poor households, while more than two-thirds live in households with incomes greater than twice the poverty line. He pointed out that those who would most benefit from a wage raise are neither poor nor nearly poor. He indicated that the EITC is better at combating poverty as it is tied to household income.

Holzer did not agree nor disagree with either Shierholz or Sabia, He noted that raising the minimum wage to $10.10 in a struggling economy may decrease jobs more than might be acceptable. Holzer does support raising the minimum wage to a more moderate rate, such as the proposed $9 per hour, while also enhancing and expanding the EITC. “I personally would prefer a lower rate with indexing or a higher rate without it,” he said. “Indexing will preserve the purchasing power of the minimum over time, and might cause a somewhat larger loss of employment.” Holzer also said that he expects “the minimum wage increase to have a larger effect than the EITC expansion to childless adults, which is much more narrowly targeted to low-income single men and women.”


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