On the way home from my Monday night basketball game (just dropped that in so you wouldn’t mistake me for a total nerd; unless you actually saw me play…), I tuned into this pretty frustrating discussion about the minimum wage versus the EITC.
First, they’re complements, not substitutes. You need both. There’s an strong economic rationale for that below, but there’s a fiscal rationale as well. We now spend $60 billion a year on the tax credit—money very well spent, as this is one of the most effective antipoverty tools in the toolbox, lifting 10 million people, half of them kids, out of poverty in 2012. And there’s certainly room for extending the credit, particularly for childless adults, who get very little help from the current structure.
But 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 my CBPP colleague Bob Greenstein 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.”
Second, one of the panelists, Clive Crook, kept saying something to the effect of “the minimum wage hurts labor demand, the EITC increases labor demand.” He may be onto something I don’t know about, and I yield to no one in my support of the tax credit, but I’ve never heard economists say it increases labor demand. It increases labor supply, for sure—a good thing, in my view: it’s pro-work in an era where antipoverty strategy for able-bodied persons is increasingly dependent on work. But there’s widely accepted evidence that by dint of the supply shift, the EITC lowers the pretax wage offer in sectors with lots of subsidized workers.
Crook may have meant that by dint of the lower-wage offer, you slide down the demand curve and increase hires, but that implies that part of the tax credit leaks out to employers, precisely why you’d want a higher minimum wage to offset this leakage. At any rate, if this sounds nit-picky, it’s not. “Increasing labor demand” in policy debates tends to mean something that pushes demand curves out (like fiscal or monetary stimulus amidst output gaps), not just makes labor cheaper (and thus slides down the demand curve).
I didn’t hear the whole show—plus I kept mentally replaying how I scored the winning basket in a key game last night—so I apologize in advance if this complementary point was in there somewhere (and someone quite effectively made the second point above, btw). But please, whenever you hear someone asserting this false choice, remind yourself that for very good policy reasons, we need both, and quickly go back to daydreaming about your athletic prowess.