A Hill Talk Editorial: Minimum wage increase vs. Earned Income Tax Credit

In the midst of persistent economic dislocation, wage stagnation, high unemployment, and many toiling in part-time jobs, numerous elected officials and candidates seeking the White House have been confronted with questions involving job creation and strategies to raise wages.

Rising up in their might, many well-intentioned individuals and organizations have called for an immediate raise in the minimum wage for a group which represents 2.6 percent of all wage and salary workers from $7.25 to over $15 per hour.

Swayed by rosy first impressions, the sight of a larger paycheck has its temptations, but those supporting an increase in the mandated minimum wage are disregarding an existing tax credit which, if expanded, would benefit a larger sample of the workforce.

Rife with disinformation and peculiar data, the campaign to raise the minimum carefully ignores the harmful effects on the very bracket of wage earners it is intended to lift from the bowels of poverty.

Setting a mandated minimum wage has had an averse effect for years, and raising it further would have several devastating consequences:

First, employers hire unskilled laborers entering the marketplace expecting to gain “X” dollars’ worth of effort from labor.  In face of the fact unskilled labor is of little value to begin, many employers will be reluctant to continue hiring practices for unskilled labor at a higher mandated wage.  As a result, a minimum-wage hike cripples job creation.

Appreciating the fundamentals of economics is obligatory:  If the price of a product is increased, there will be less demand for the product.  Similar to any commodity, raising the mandated wage would produce less demand for labor.

As of October 2015, teen unemployment rests at 11 percent, while the unemployment rate for black teens endures at an astonishing 25 percent.  Raising the minimum wage will deny unskilled teenage laborers the opportunity to gain employment, develop a skill, become valuable to an employer and acquire an increase in hourly wages.

Second, the typical minimum-wage earner is not a family’s bread-winner, but rather a 15-20-year old laborer who works at a coffee shop, is employed at a fast-food restaurant or in a grocery store stock room

48 percent of all minimum-wage earners reside in homes where the income level rest between $15,000-$59,000 yearly, with an average of $48,000 a year, which is three times the poverty level. 

A minimum wage increase helps the wrong people.

Third, the most ardent supporters of a raise in the minimum wage are labor unions which are manipulating the matter for their own benefit.  Many union laborers use the mandated minimum compensation as a benchmark to determine their own wages.

Arguing they are skilled, many union workers typically demand four times the minimum wage.  At $7.25 hourly, this translates to $29 hourly, plus union benefits.  Raising the minimum wage would spur an increase across the entire spectrum of wage earners and, again, reduce the demand for labor.

Fourth, an increase in the minimum wage harms unskilled jobs and compels its replacement with automated machines.  If robotics and automation can replace skilled laborers on an assembly line, imagine what the effects are on unskilled labor.  Increasingly, checkout lines at grocery stores or a pharmacy are no longer manned by individuals earning minimum wages but substituted with self-checkout machines.

Despite empirical evidence to illustrate some severe consequences of raising the minimum wage, an alternative, imperfect as it may be, is an expansion of the Earned Income Tax Credit (EITC) to alleviate low-to-moderate income earners.  26 states currently apply the EITC to their tax codes.

Unlike the minimum wage, the EITC rests on a family’s income – those with children particularly – and increases as additional dependents are included.  With a modest initial credit for childless couples, the credit expands per child.

With one child, the credit is $3,250; a second child increases the credit to $5,372; and for a third, the EITC expands to over $6,000.  These are serious numbers which cannot be ignored.  Additionally, the EITC is a tax credit which does not trigger wage or price increases.

The EITC, however, is not without flaws.  Should the tax program expand, it will stimulate a further increase in the deficit; budget projections for 2015 estimated the existing EITC would contribute $70 billion in the budget shortfall.  Further, it is stated the EITC only creates a modest increase in the workforce, is subject to occasional fraud, and responsible for frequent over-payments from the federal government.

While neither the EITC nor the minimum wage can permanently alleviate the effects of poverty, the EITC is a solution that lifts the working poor from their plight without harming the economy.

Although likely to spur rich debate, when weighing the benefits between raising the minimum wage and expanding the EITC, consider that the latter will reach a much wider audience of wage earners.

To be real-life practitioners of family advocacy and to assist households, the earned income tax credit offers the greatest benefit for those living with financial uncertainty.

 

[cbbp.org] [fivethirtyeight.com] [trading economics.com] [bls.gov] [heritage.org] [CNN] [Photo courtesy hr.williams.edu]