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February 27, 2007

EITC vs. The Minimum Wage

You often hear conservatives argue that we shouldn't increase the minimum wage, we should raise the Earned Income Tax Credit. Setting aside the claim's disingenuousness -- not much in the way of EITC increases after six years of Republican governance, I fear -- it's not true that the two policies are interchangeable. The minimum wage has uses and benefits that tax credits don't, and vice-versa. Over at EPI, Max Sawicky has a paper laying those variations out in full.

He concludes that while simplifying and expanding tax credits may be a worthwhile policy objective, "boosting incomes with a higher minimum wage avoids the dangers of reduced work incentives and larger marriage penalties in the income tax, escapes the burden of offsetting the cost of an expanded credit under the pay-as-you-go rules, foregoes the complexity of redesigning the tax system, and provides a benefit in plain view of the worker." That PayGo bit is particularly important, as the Republicans left the budget in such a mess there's really not much room for new spending (which Republicans will also fight).

Boosting the EITC may be a good thing -- I certainly am sold on it -- but it's not an either/or choice, and a serious expansion/reform of the EITC and tax code are, in the short term, considerably less achievable than a boost in the minimum wage. Indeed, if Republicans were really serious about blocking the wage increase but helping poor people, they could have ratcheted down the pressure by increasing tax credits during their years of unified governmental control. That they showed no interest in doing so is further evidence that the sudden affection for the EITC is a diversionary tactic.

Also at Tapped.

February 27, 2007 | Permalink

Comments

I have always been against the EIC for theoretical reasons. This is a welfare function and should be administered by a different agency.

Posted by: Fred Jones | Feb 27, 2007 7:00:57 PM

That liberals would conclude that you need both is revealing, because the appeal of EITC to conservatives, I suspect, is as a substitute for a rise in the minimum wage. In such circumstances, the EITC becomes a subsidy for employers, more than for employees, which is what makes it appealling to conservatives.

Do we want to be subsidizing employers' use of low-wage, low marginal productivity workers?

If you think worker productivity is mostly a matter of the characteristics of the worker -- education, intelligence, ambition, etc. -- then subsidizing, in order to bring low-productivity employees into the workforce makes sense. You might even be doing the low-productivity worker a favor, by giving her a chance to acquire experience and habits, which will make her a high-productivity, and therefore high-wage, employee later on.

If, on the other hand, you tend to think that productivity is mostly a matter of capital -- equipment, on-the-job training and organization -- then subsidization is a really bad idea, because it encourages employers to slack off on making the investments, necessary to raise marginal productivity.

A higher minimum wage could become a driving force in encouraging more investment in tools, training and organization, which results in higher marginal productivity for workers, as well as higher incomes for workers.

Posted by: Bruce Wilder | Feb 27, 2007 7:45:23 PM

If, on the other hand, you tend to think that productivity is mostly a matter of capital -- equipment, on-the-job training and organization -- then subsidization is a really bad idea, because it encourages employers to slack off on making the investments, necessary to raise marginal productivity.

This really doesen't follow.

And the EITC is awesome. The best thing Government did since Social Security.

Posted by: DRR | Feb 27, 2007 7:49:48 PM

Well... yeah. This is obvious from reading Mankiw's smug disparaging of the minimum wage without ever seriously pushing for an EITC increase.

Posted by: eriks | Feb 28, 2007 7:38:12 AM

People on the left often claim the EIC subsidizes low-wage work, but I have yet to see one such person offer a scintilla of evidence.

Posted by: Miracle Max | Feb 28, 2007 3:03:17 PM

Given that cost of living varies greatly from state to state, does it make more sense for minimum wage (if there is to be one) to be a state issue rather than a federal issue? The folks in San Fran like to boast of their progressive minimum wage which is now $9.14/hour, but I would bet that someone living in Ohio will fair better on Ohio's $6.85 minimum wage. I personally favor an EIC approach, but even that does not take into consideration the variations in cost of living. Then again, as far as I am concerned, if you can't do better than minimum wage, there is no reason why you can't earn that wage some place cheap rather than some place that is expensive to live in.

Posted by: Brent | Apr 22, 2007 4:55:15 AM

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Posted by: judy | Sep 26, 2007 11:09:22 AM

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