Greg Mankiw Offers a False Choice re Minimum Wage or EITC

January 4th, 2014 at 6:36 pm

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.

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22 comments in reply to "Greg Mankiw Offers a False Choice re Minimum Wage or EITC"

  1. smith says:

    Of course Mankiw knows EITC is a wage subsidy that benefits businesses who pay less than adequate wages. And though the blog here acknowledges EITC lowers everyone’s wages by 27%, it doesn’t say how it’s possible to counteract this effect. Fortunately, I can. As noted before, EITC could be entirely replaced by raising the minimum another $2.50/hour. But in the worst case scenario, there is no need to discontinue EITC or change it significantly for that to happen. Just keep raising the minimum until no one qualifies for EITC anymore. That should be everyone’s goal.

    Also left out of the equation are businesses that are penalized for paying over the minimum so they either unethically pay just the minimum or are driven out of business by competitors with less scruples, part of what I’d call the WalMart effect.

    You don’t need EITC with an adequate minimum.

    • smith says:

      Apropos how EITC is a form of corporate welfare…

      “According to Walmart, full-time store workers now earn $12.78 per hour on average, or 28 cents higher than the proposed D.C. mandate.”

      Average, doesn’t mean starting wages are less, figure includes some managers paid hourly, and does not include part-time workers. Data is seemingly not available on the percent of part time Walmart Employees. One estimate floating on the internet peg average Walmart wage of all hourly employees at $8.81, but other than links, nothing to back that up.

      Also, just the fact Mankiw is for it tells you something.

      • Kaleberg says:

        Basically, Mankiw wants the government to buy every marginal business a pony.

        If you have a business giving pony rides, you should have to buy hay for your ponies. If you can’t charge enough to do that, you don’t have a working business model and deserve to go out of business in a capitalist society. Mankiw is arguing that people with flawed business models should rely on the government to buy them all the ponies they want. God damned Marxist.

    • CABchi says:

      I think you are exactly right. Moreover, it is a much more politically potent argument, because it turns the R anti-minimum wage arguments on their head. Basically, we – the taxpayers – are subsidizing huge corporations, allowing them to pay poverty level wages to their employees. Why should we do that? They could never get away with paying these poverty level wages without the added income support that the taxpayers provide through programs like the EITC and food stamps. If you want to slash the cost of these welfare programs, then raise the minimum wage. Let’s reward those who work, not those big corporations sponging off the rest of all the rest of us taxpayers.

    • Rob Schwartz says:

      The artificially low wages paid by Walmart et al. only cut into the EITC about 20% or so and you want to raise the minimum wage the full amount of EITC. Why do you want to stop at the value of EITC? Shouldn’t employers pick up the cost of their employee’s food stamps, medicaid, and CTC?

  2. JaaaaayCeeeee says:

    It’s a relief when you take the time to articulate the goals and risks of policy proposals and claims. This is how public debate for normal budget legislating, and economics reporting, should inform voters.

  3. Robert Boxer says:

    I recently wrote an article about how an increase in the minimum wage rate increases unemployment. You can read it here:

    • SeattleAlex says:

      That’s a lot of words without much content. You are of course operating under the age old conservative dogma that the wage these low income earners are paid is perfectly representative of their production value. Never mind the fact that they have the lowest bargaining power of any such worker group and that many are employed by entities who use plenty of their own bargaining power to keep these wages low. For us from the left this is not merely a moral issue (though it is in part) rather it is supported by plenty of examples both locally and federally in which minimum wage was raised and employment levels were not adversely affected. You claim that when a worker increases his productivity he in turn will increase his own and everyone else’s purchasing power yet there has been obvious wage stagnation over the past few decades with average compensation lagging behind productivity growth. In other words the income is being redistributed from paychecks to profits. I personally don’t mind turning that tide in the opposite direction with a moderately sized increase in the minimum wage.

  4. Mark Jamison says:

    Surprised you didn’t call him on his structural argument in the first couple of paragraphs. Mankiw suggests that if workers had more education or skills they would make more money. Two problems with that, the data don’t seem to suggest that as the sort of total solution Mankiw advocates. He’s very subtle here but the way it reads he says, education and skills would fix the low wage problem but if we don’t have that then….
    Wages have been low across the board, cue plug here for someone’s new book Getting to Full Employment. A certain segment of the population is always going to be in the low wage sector. An individual may increase her potential wages by acquiring education or skills but an undifferentiated sector is always going to be at the low end. The problem then is to define policies and economy that has reasonable levels of fairness built into the system. Efficiency can’t be the only value of an economic system, further, a truly efficient system must also be a fair system. Wasting human potential and suppressing the potential for a happy and dignified participation in the economy is neither efficient nor fair. Policies which promote low employment and low wages are inherently inefficient in promoting the general welfare.
    A decent living wage ought to be a basic human right. If we grant rights and privileges to corporations then we can also require responsibilities and we certainly can grant rights and privileged to labor.

    • smith says:

      Why do you claim “a certain segment is always going to be in the low wage sector”. Says who? While low skills jobs currently have a surplus of willing applicants, many countries, the U.S. included, fill a great deal of those positions (and high skill positions too) with foreign labor. While it’s possible to keep a “reserve army of labor” by importing workers and denying them mobility and any basic bargaining power, or by exporting jobs, or by denying equal educational opportunity to a large segment of Americans, that’s a choice made by the body politic.

      Individuals can not acquire skills and education when the system is rigged against them, when high school doesn’t prepare them for jobs, college costs rise, unemployment stays high, and wages stagnate or fall.

      Undifferentiated sector is not always going to be at the low end. It isn’t the case now. Wherever unions are strong, undifferentiated low skills jobs command higher wages.

      If everyone is educated as both Obama and Mankiw want, you’re going to have to pay everyone well or no one will take the low paying jobs. Immigration won’t help because keeping them in low paying jobs is racist. Look for Rosie the robot.

      Income distribution should look more like a bell curve vs. the current children’s slide, where a huge segment, 1/3 makes 1/2 to 1/3 what everyone else makes.

  5. Denis Drew says:

    According to big (biggest?) minimum wage critic David Neumark, $55 billion is transferred to poor working families every year by the E.I.T.C. — and that ironically says it all. That much money represents a third of one-percent of our $16 trillion economy.

    That much equates to a federal minimum wage raise from $8 to $9 an hour (if it were $8 already) which would shift about $40 billion to the bottom 20% of workers — who take home all of 2% of American income. That would represent one-quarter of one percent of our $16 trillion economy — talk about trickling down the trickle down.

    Qualitatively both the E.I.T.C. and a federal minimum wage hike from $8 to $9 sound may sound mighty good (maybe even impressive) but quantitatively neither do much to reverse our income inequality nightmare (more like wonk daydreams?).

    A $15 an hour minimum wage OTH would shift about $560 billion — 3.5% of a $16 trillion economy — from the 55% of earners who now take 90% of income to the left behind 45% of American workers who currently take only 10%. Can anyone foresee the 55% responding in the market by telling the 45%: Stay home; we don’t need your output anymore?

    The car notes of the 55% wont go up, nor their mortgage payments or medical premiums. Nordstrom might lose a bit of its market share; Target might gain; fast food should do fine after half the workforce gets an average $8000 raise.
    The first economic number everyone looks at every quarter (for their own good) is the rate of GDP growth. The last number anyone seems to look up when comparing today’s wages to yesterday’s wages (particularly gauging the minimum wage) is the exact same economic growth — as if the last 180 mostly growth quarters (since 1968) never happened.

    In 1968, the federal minimum wage under president Lyndon Johnson was almost $11 an hour. Indexed for both inflation and per capita income growth, by 1978, it would have reached $14+.

    • Dave says:

      We’re with you. $15 is a good target for now. I don’t know why we can’t push for this federally except for the fear of the inability and unwillingness of many Democratic leaders to defend it. The problem is with Democratic leadership, it isn’t with the population or the polls.

      • CABchi says:

        I agree with you, but I don’t think we can just repeat all the old – even though true – arguments we have made in prior minimum wage fights. I think we have to also argue that (1) poverty level minimum wages are nothing more than taxpayer subsidies of huge corporations; (2) these corporations could never get enough people to work at these poverty level wages, if the workers were not also getting extra governmental financial support provided to them through taxpayer programs like EITC, food stamps and Medicaid; (3) so, if the politicians are serious about wanting to cut the cost of these programs, the way to do that is by raising the minimum wage; and (4) by the way, let’s make it easier for workers to decide, without coercion, whether they want a union. I think we should throw in the union angle, just to make the other side fulminate, fume and sweat a little.

        • Dave says:

          I agree that the threat of unionization is an important one. It just needs to be more credible.

          Laws have been written such that employees of Walmart are afraid of even mentioning the word. We know it is illegal for companies to retaliate for saying such things, and we also know that enforcing that law is impossible.

          All employees of Walmart are required to watch anti-union videos as part of their training. This is very legal, but it carries with it a hidden message — talk about unionization and you’ll be shoved out of the company one way or another.

          Both of our political parties hate unions. The Clintons are pretty much the face of Walmart. The Clintons were not Democrats in my opinion, they were just Republicans in sheep’s clothing.

  6. Dave says:

    Mankiw talks about fairness to businesses rather than fairness to people. Fairness to business is not something a capitalist believes in. So I view this as an indication that Mankiw is actually not a believer in capitalism, but is rather a believer in the extreme right-wing notion of the government being primarily concerned with its effect upon business owners rather than people in general. There’s a term for that.

    I would argue that if EITC recipients are actually receiving a net flow of funds from the government rather than the other way around, that we have a serious problem with the minimum wage. If a business cannot pay for the workers required to do that work, it shouldn’t exist in a capitalist system. Something else can take its place.

    The lower bound on wages is about basic human dignity and fairness to people. It isn’t about fairness to businesses. I find this entire line of reasoning by Mankiw very dangerous.

  7. Stella Barbone says:

    There is grumbling from the Tea Party wing about the EITC, too. Immiseration of the poor is the goal. The GOP believes, after all, that the federal government subsidizing health insurance indirectly by way of the employer’s taxes is good, but that the federal government subsidizing health insurance directly is bad.

    Are there no workhouses?

  8. Anthony Bell says:

    A jump of, say, $5 an hour for Walmart employees, most of whom make about $10 an hour, would boost Walmart’s labor costs which currently run about 10% of sales by 5%. That would cause Walmart to raise prices by 5%, assuming it maintained its low 3.5% profit margin.

    A $10 pair of jeans would goo $10.50; a $5 blouse would go to $5.25. Would that damage Walmart’s profits? On the other hand, a 50% increase in minimum wage ($9 an hour here in Oregon) would provide a huge boost in sales (and profits) from Walmart customers who overwhelmingly are drawn from the low wage sector of the population.

    Hence a big boost in the minimum wage would end Walmart’s same store profit doldrums of the last couple of years that Walmart openly admits are due to the faltering purchasing power of its customers.

  9. Frances Coppola says:

    If you have EITC you also need a minimum wage. This is to prevent employers bidding down wages to the floor. With no EITC, the ability of employers to do this is limited by the existence of unemployment benefits, which make it possible for workers to refuse starvation-wage jobs. With EITC, though, employees will accept starvation wages in the certain knowledge that the state will top them up. So there is in effect collusion between employers and employees to obtain state subsidy for wages. To protect taxpayers and maintain some labor market function, therefore, you have to set a floor under wages. I’m amazed Mankiw can’t see this.

    Oh, and by the way I live in a country which has both EITC and a minimum wage. That country is the UK.

    • Dave says:

      Thank you, Frances. I wonder if we shouldn’t just think about EITC as a program to smooth the bumps of moderate lifestyle differences over time — such as marriage and children, and think of a minimum wage as providing the ultimate floor to human dignity.

      Jared is right, and I think this is what he would probably advocate, although I’m new to the discussion and have no background. What I said above just seems to be economic common sense.

      Mankiw, I suspect, is taken with American, Corporate Libertarian power. American Corporate Libertarians advocate poverty wages for workers. They’re fine if the government temporarily tries to subsidize these workers because they know that over time foreign governments that don’t subsidize such workers will win out, granting power over to the multinationals over governments.

      • CABchi says:

        Do you think the Columbia Business School releases the names of its major donors? I wonder if that would give us a little insight into the underpinnings of Dean Manikew’s views.

        • Dave says:

          Greg Mankiw works for Harvard. Many Universities release their donor list willingly. It is hard to track most donations to specific professors, and in most cases it isn’t necessary. Universities tend to have a way of making its need to please major donors known to its staff.

          This isn’t usually about the school donors. It is usually about the money that professors like to make on the side and after retiring from academics.