Once again a minimum wage opponent is trotting out what is now an old chestnut in this debate: we don’t need the minimum wage when we’ve got the Earned Income Tax Credit.
That’s the theme of a piece by economist Greg Mankiw in today’s NYT, wherein he argues that low-wage workers, the firms that hire them, and we “as a nation” would be better off if we just got rid of the minimum wage and increased the EITC (actually, I’m unsure if he’s calling for an increase in the tax credit or just citing its existence; if he does want it increased, he needs to say so; better yet, offer a concrete proposal—DC policy-makers don’t do nuance on this stuff, Greg).
For reasons I’ll stress below, it’s increasingly agreed upon that the choice Mankiw offers—EITC or minimum wage—is a false one. We need both. In fact, they’re complements. Pushing either too far invokes risks, though Mankiw ignores the risks of depending wholly on the EITC to lift the earnings of low-wage workers.
Before discussing their complementarity, let’s look at Mankiw’s argument. He views the minimum wage as a tax on companies that hire low-wage workers, and as such, believes it’s unfair to concentrate that “tax” on the businesses that hire such workers.
What’s odd here is that he then goes on to argue that the decline in the real value of the minimum wage which advocates hope to correct is “beside the point.” But if the minimum wage is a tax on low-wage employers, then a decline in its real value is a tax cut. Replacing its lost historical value and indexing to inflation, as are other taxes (including the EITC), thus makes sense, even within his own model.
Another very odd argument: “…this group [low-wage employers] is already doing more than its share. After all, it is providing jobs to the unskilled. Asking it to do even more, while letting everyone else off the hook, seems particularly churlish.”
First, what’s this about letting everyone else off the hook? Taxpayers contributed something like $60 billion last year to the EITC is terms of revenue forgone and refundable credits to low-income workers without federal tax liabilities!
Second, when they hire workers low-wage employers are not engaging in philanthropy. They hire the workers they need to maximize profits given demand and the relevant costs they face, like labor and capital. In what sense are they doing more than their share? He may mean that because of the existing minimum wage, they’re paying above what the market would dictate. But that’s actually a key point of the minimum wage: the bargaining power of low-wage workers is so weak that Congress steps in to offset a “market wage” that risks being unfairly low.
Historically, economists have argued that injecting fairness into the mix will introduce unintended effects that will hurt the intended beneficiaries. But years of careful empirical research show otherwise. It’s not that there are “no side effects”—Mankiw’s straw-man assessment of those who defend an increased minimum. It’s that the beneficiaries of moderate increases have consistently been found to far outnumber those hurt by it. When low-wage workers advocate for higher minimums, it’s not because they’ve failed to take Mankiw’s courses at Harvard. Their advocacy is consistent with a large body of research.
Finally, there’s a highly conspicuous omission amidst all the love Greg heaps on the EITC. Justified love, for sure; the EITC is a highly successful, well-targeted program that encourages work and lowers poverty. But if the minimum wage is a tax on low-wage employers, then the tax credit is a pretty hefty subsidy. By increasing the supply of low-wage labor, some of its benefits accrue to employers in the form of lower pretax wage offers. Rothstein finds this subsidy to amount to 27 cents of each EITC dollar, lowering pretax wages of both EITC recipients and non-recipients (with the latter, of course, getting no offset from the credit).
It’s very hard to imagine Mankiw is unaware of both this dynamic and this research. But it’s one of a number of reasons why we need both a higher minimum wage and an expanded EITC, and is thus perhaps an inconvenient truth for his case.
In the real world, to place the full burden of “making work pay” for low-wage workers on the EITC threatens to place too much pressure on the program. As Bob Greenstein, president of the Center on Budget and Policy Priorities, recently noted, “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.”
CBPP, where I also work, has worked on both the EITC and the minimum wage for decades, often referring to them as the twin pillars needed to support low-wage work (Mankiw’s call for skill improvement is yet another pillar). We are motivated by the reality that too many working families depend on jobs that fail to pay wages that allow them to make basic ends meet. To meet this market failure, numerous policies have evolved over time, including work supports like the Earned Income Credit or the Child Tax Credit, as well as the minimum wage. We need both, and Mankiw’s argument, with its plethora of conspicuous omissions, misses that simple reality.
UPDATE: Dean Baker adds important points, also left out of Mankiw’s analysis, about the incidence (who ultimately pays) of the EITC and min wg.