Listening to the OECD and IMF (!?#*!) on the EITC/Minimum Wage Connection

June 17th, 2014 at 6:22 pm

I see where my CBPP colleague CC Huang has a nice post up summarizing one of the recommendations from a new Organisation for Economic Co-operation and Development’s (OECD) report on the US economy.

The report touts the virtues of the EITC as a wage subsidy for low-income workers that both encourages work and reduces poverty.  They go on to emphasize an EITC reform that we too have gotten solidly behind:

To make the EITC even more effective, the OECD suggests strengthening the credit for childless workers (including non-custodial parents) by expanding their credit and lowering the age eligibility threshold from 25 to 21.  Since childless workers now receive little or no EITC, it’s “less effective at increasing employment and reducing poverty” among this group, according to the OECD.

In part because the EITC for childless workers is so meager, childless workers are the sole group that the federal tax system taxes into poverty.

The EITC is a rare anti-poverty program that gets a fair bit of love from both sides of the aisle.  But to their great credit, the OECD goes a step further, making the important additional point that an EITC expansion “would be more effective if supported by a higher minimum wage.”

Back to CC:

As we’ve explained, the EITC and federal minimum wage are complementary ways to support low-wage workers, not alternatives.  One reason is that the EITC, by increasing the number of people seeking jobs in the low-wage sector, can put downward pressure on the wages that employers offer potential workers.  A higher minimum wage helps offset that effect.

The OECD points out that the effects of minimum-wage increases on employment are “uncertain” and recommends carefully monitoring the impact of any such increase.  But it also notes, “[t]he value of the minimum wage has declined significantly in real terms over time” and “[r]elative to the median wage, the current federal minimum wage is well below the average statutory minimum wage in OECD countries.” [See first figure below; it’s also low relative to the median wage: see 2nd figure.]

So far, so good.  But here’s the clincher.  The International Monetary Fund (IMF), an institution no one would mistake for wild-eyed econo-radicals, made much the same argument in their new US report:

“…given its current low level (compared both to U.S. history and international standards), the [US] minimum wage should be increased. This would help raise incomes for millions of working poor and would have strong complementarities with the suggested improvements in the EITC, working in tandem to ensure a meaningful increase in after-tax earnings for the nation’s poorest households.”

The quality and depth of the IMF’s work has hugely improved in recent years, but still…for old hands like yours truly, reading this excerpt brought to mind the flying pig you see here.



Source: OECD US Report


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7 comments in reply to "Listening to the OECD and IMF (!?#*!) on the EITC/Minimum Wage Connection"

  1. Smith says:

    Even the subtitle of the paragraph when you follow the link is illogical and contradictory
    “Adequate Minimum Wage Needed to Complement EITC”
    If the minimum wage was adequate, there would be no need for an EITC.
    The paper goes on to say:
    “For example, because the EITC is a proven work incentive, it expands the number of people seeking jobs in the low-wage sector, which can put some downward pressure on the wages that employers offer potential workers.[19]”
    If this were true, it would add to my argument, but in reality I wonder how many people looking for low wage work compute, oh this is a low wage job but next year when I do my taxes I’ll get an EITC credit or if I earn less than minimum, I’ll get a refund.

    Same thing goes for childless workers who would earn $10.10 * 40hr = 404/week or $21,000/year. How many would be discouraged from even looking for a job because every time they saw an ad they’d say to themselves, man it’s just not worth it unless I’m getting the end of year Earned Income Tax Credit of around $3,000 based on my low AGI which doesn’t taper off until I reach $50,000.
    “Expanding the EITC for childless workers would help the two policies work together more effectively to lift the incomes of low earners while also providing stronger incentives for more childless adults to enter the labor force.”
    Supporters of expanded EITC say this is happening all the time.

    If people fall into poverty because they don’t or can’t work enough, figure out why that is so and help them. Don’t create an expensive program that business and conservatives love, suppresses wages, hurts fair wage employers, taxes the middle class, and masks true needs of higher wages, free and/or affordable child care, training and education, and available jobs. Who needs more help, the poorly paid or the unpaid? How many jobs would EITC’s $60 billion/year buy? 200,000? The difference is EITC is spent on anything, but 200,000 new government jobs would add needed services.

  2. Robert buttons says:

    Are there any OECD countries with alower MW than the US?

  3. Elwailly says:

    “the effects of minimum-wage increases on employment are “uncertain””

    If unemployment is higher than the “full employment level” (The level at which inflation starts excelerating) then by definition there is slack in the economy. Why can’t the central bank by controlling the demand side drive unemployment towards a desired number even at the higher minimum wage?

    If the central bank refrains from moral judgments about the desirability of a minimum wage and simply targets NGDP then the economy will adjust with slightly higher capital substitution for labor and a slightly higher fraction to total NGDP going to labor. Labor will still be “fully employed” due to the macro environment.

    Leave the moral desirability of the decision to set a minimum wage to elected representatives and just make sure macro policy is sound and workers will find the jobs even at a higher minimum wage. There are voices on the right that always remind us we can’t ignore the monetary response in questions of fiscal policy. Why draw supply/demand curves that do just that in this particular case?

    • Robert Buttons says:

      I keep hearing “the fed can do this” and “the fed can steer that” but judging by the most recent GDP, I have yet to see it work. What evidence would I need to produce to convince you fed action is, at best, impotent and, at worst, destructive?

      • Elwailly says:

        “judging by the most recent GDP, I have yet to see it work”

        I suspect the fed is getting exactly what it wants, reasonable GDP growth with well contained inflation. You may judge the situation inadequate but just your priorities being different.

        My point is the macro environment will not change much due to a minimum wage policy due to active steering from the fed. Simple supply/demand curves don’t reflect that.