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Minimum Wage vs. EITC

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Minimum Wage vs. EITC

December 10, 2013

Advocates for raising the minimum wage often claim the rate’s real value has fallen since it was first implemented. University of California (Irvine) economics professor David Neumark, in the New York TimesEconomix blog, adds a new component to the debate by accounting for the earned-income tax credit (EITC). 

Since it was created in 1976

, the real value of the EITC has increased dramatically, from roughly $1,500 in the 1980s to more than $5,000 today in 2012 dollars, for a two-child family. The following graph follows Neumark’s methodology to track the values of the minimum wage and EITC since 1976:

 

 

Neumark suggests that proponents of raising the minimum wage narrowly focus on one aspect of federal poverty policy and neglect the benefits of others, such as the EITC. The minimum wage acts as a tax on businesses that employ low-wage workers, making it more difficult for unskilled laborers to find work. 

Alternatively, the EITC makes it easier for low-wage workers to rise out of poverty. Not only does the credit allow low-wage earners to keep more of their income, the program’s incentives reward hard work—unlike some other welfare programs. Research has consistently shown the minimum wage to be an ineffective method of helping people escape poverty. Alternatively, the EITC has substantially boosted living standards for the least well-off.

The EITC also shows superior distributional results than the minimum wage. If policymakers increase the minimum wage, the practical effect is cost increases placed directly on low-wage employers and their customers, not to mention the low-wage earners who may lose their jobs. The EITC’s only effect is lost federal tax revenue which, if necessary, can be recouped by taxing Americans who are better able to shoulder the burden.

Many minimum wage earners are not in poverty. James Sherk of The Heritage Foundation found that the average family income of minimum wage workers exceeds $53,000 a year. This means increasing the minimum wage benefits some who do not require government assistance. The EITC only helps those Americans who need it most.  

If the goal of federal poverty policy is to help low-income earners, the EITC is a far superior policy to the minimum wage. Any case made for raising the minimum wage that ignores increases in EITC levels is incomplete. 

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