More On the False Choice of Higher EITC or Minimum Wage

February 25th, 2014 at 8:52 am

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.

Why frustrating?

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.

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5 comments in reply to "More On the False Choice of Higher EITC or Minimum Wage"

  1. smith says:

    The notes above tend to reinforce my position, except I contend EITC doesn’t just leak to employers, it flows. In the process it lowers wage rates for everyone.
    EITC is currently designed to help low wage and lesser amounts to middle income workers with children. I don’t understand the rationale for increasing benefits for those without dependents.
    Where is it acknowledged the goal should be to create conditions where EITC is not needed? If wages are substantial enough to support single parents (or single earners) with children, child care is cheap enough, and jobs are plentiful enough, especially for two earner families, the need disappears, without touching the existing program.
    It should also be said that a mere $3.00/hr raise in wages (3x40hrx50=$6,000) equals near the maximum benefit for EITC. A small move towards more equitable distribution of income would eliminate the need EITC.
    Again, it is no accident the largest increase in EITC came under Bush, and conservative economists and politicians support it. I know this blog may disagree, but EITC is a poor replacement for a well functioning economy.

    • smith says:

      Actually, not totally sure largest EITC increase came under Bush, but it was substantial. Also, the gradual (and costly to the government) taper of EITC acknowledges the disincentive that wage supplements create, vs. measures to increase wages with market mechanisms like improving skills, promoting competition among employers, and protecting unfair competition from globalization (currency manipulation, absence of environmental and labor protections).

  2. Jake says:

    Timely post. The Minnesota Legislature just began the 2014 session, and this exact same conversation is taking place as they begin to debate raising the minimum wage. However, the argument for EITC expansion (as opposed to a minimum wage increase) is being viewed through the lens of equity. Some are arguing that raising the minimum wage would unfairly burden only those businesses that employ workers at that wage level, whereas an EITC expansion would be more equitable in spreading the burden over the entire tax base.

  3. John Glover says:

    Come on, Jared! You act like these guys don’t realize that what they’re suggesting results on lower wages.

    Of course they understand that. It’s a feature, not a bug.

  4. Fred Donaldson says:

    EITC is a payment indirectly to companies that society believes do not pay a living wage to their workers. These firms will continue to pay slave wages as long as the subsidy continues. Without these subsidies the companies would have not enough workers, unless they paid higher wages.

    Taxpayers are supplying food and shelter to workers, who do not earn enough in some cases to even stay alive. Think of the coal miner living in a cardboard box, supplied by the community as charity, while the mine owner buys another mansion with the savings from such support. In the EITC case it is not even charity that supplies these payments to businesses, but taxes that are forced payments by threat of jail or sacrifice of individual assets.