While many consider a minimum wage increase as a means to ensure economic equality and alleviate poverty, the evidence supporting this claim does not add up. Instead, policymakers should look to the Earned Income Tax Credit as a more effective approach to assist those in need.
In a 2014 article in the Wall Street Journal, David Neumark challenges the notion that minimum wage increases effectively support low income families and individuals, instead pointing to the Earned Income Tax Credit (EITC) as a more successful policy for poverty alleviation. Neumark, the Director of the Center for Economics and Public Policy at UC Irvine, calls minimum wage policy “an ineffective tool for helping poor families, because such a small share of the benefits flow to them”.1 The Obama administration’s proposal to increase the federal minimum wage reveals a lack of knowledge about the demographics of poverty. If the goal is to increase net income for poor households, expanding EITC would be a more targeted and effective approach.
A recent Congressional Budget Office report demonstrates Neumark’s point that a minimum wage increase is ineffective at alleviating poverty, as the benefits of an increase are not distributed mainly to the poor. While an increase in the minimum wage would undoubtedly result in the loss of jobs, estimated at anywhere between 500,000 to 1 million, this loss should be weighed against the increased income for more than 16.5 million Americans.2 However, because the goal of raising the minimum wage is to lift individuals and families out of poverty, it is important to consider who will benefit; of the expected $31 billion in increased income, only 19%, or $5.9 billion, would go to households below the poverty line, compared to the 29%, or $9 billion, that would go to households making three or more times the poverty threshold.2 Thus, it becomes clear that supporters of a minimum wage increase do not appreciate what poverty looks like. Just because a family qualifies as poor, it does not mean that the primary earners make minimum wage and would benefit from an increase.
Neumark points to EITC as a viable alternative to a minimum wage increase because it better targets the working poor. Since starting in 1975, EITC has become the third largest public assistance program in the nation behind Medicaid and SNAP.4 While a minimum wage increase largely benefits those above the poverty line, EITC targets low income households by allowing workers to take home more of their paychecks and effectively increasing their net incomes. A married couple with two kids earning the maximum $49,186 a year, is eligible for $5,460 in savings, equal to 11% of their total yearly income.3 Unlike to a minimum wage increase, only low to moderate income households are eligible for EITC, allowing all benefits to go specifically to those in need.
Moreover, while the majority of current EITC benefits help families, EITC should be expanded to assist individuals as well. A household with no children earning the maximum $19,680 a year, can receive $487 in tax credits, or just over 2% of their annual income.3 Increasing the take home percentage to be equal with that of a family’s would greatly increase EITC’s reach and ability to lift people out of poverty.
As a tax credit administered through the tax code, any increases to EITC has the benefit of being paid for by the highest earners, whereas increased minimum wages would be paid by the employer.1 As Neumark puts it, “some employers of low-wage labor may be rich, but many are not”.1 Minimum wage increases work well for politicians going into election season, but they do not work well at helping lift people out of poverty. EITC was designed to target poor households, and an increase of its benefits would go solely to those in need. Simply put, a minimum wage increase benefits least the people who need help the most.
Nick is a Master of Public Policy student at the Johns Hopkins University, Bloomberg School of Public Health. Please send any comments to firstname.lastname@example.org
1 Neumark, D. (2014, July 6). Who Really Gets the Minimum Wage. Retrieved September 18, 2014, from The Wall Street Journal Online: http://online.wsj.com/articles/who-really-gets-the-minimum-wage-1404683348
2 Congressional Budget Office. (2014, February 18). The Effects of a Minimum-Wage Increase on Employment and Family Income. Retrieved September 18, 2014, from Congressional Budget Office Website: http://www.cbo.gov/publication/44995
3 Internal Revenue Service. (2014, March 27). EITC Income Limits, Maximum Credit Amounts and Tax Law Updates. Retrieved from IRS: http://www.irs.gov/Individuals/EITC-Income-Limits,-Maximum-Credit--Amounts-and-Tax-Law-Updates
4 The Heritage Foundation. (2013, August 20). Spending on the Largest Anti-Poverty Programs. Retrieved from The Heritage Foundation: http://www.heritage.org/multimedia/infographic/2013/08/federalspendingbynumbers2013/page-9-chart-1