Evaluate alternatives to raising the minimum wage
Though a boost in the minimum wage may be popular, the Earned Income Tax Credit for low- and middle-income workers is a superior alternative.
The minimum wage sets a floor ― or a minimum ― for the price of labor. It came out of the Great Depression, a time when the economy’s lowest-skilled workers ― even though many were represented by unions ― lacked the necessary bargaining power to negotiate a fair wage against large corporations. President Franklin Roosevelt instituted the first minimum wage in 1938 under the National Industrial Recovery Act, a program, in part, designed to “raise wages, create employment, and thus restore business,” according to the United States Department of Labor.
Since then, the federal minimum wage has grown 22 times to, most recently in 2009, $7.25 per hour. President Barack Obama has expressed support for raising that wage once again. In 2014, the president passed Executive Order 13658, effectively raising the minimum wage to $10.10 for all workers on federal construction or service contracts. According to a United States Department of Labor factsheet, the law was projected to positively impact 200,000 workers. Obama also supports the Raise the Wage Act, sponsored by Senator Patty Murray (D-Wash.) and Representative Robert Scott (D-Va.), which would raise the federal minimum wage to $12 by 2020.
Comparatively, adjusting for inflation, the current wage of $7.25 is rather low – 20 percent lower, in real terms, than the wage under President Reagan in 1981. In fact, as it stands, a full-time worker making the minimum wage who supports a family of two or more, including the worker, is under the poverty line, according to a Dec. 4, 2013 Economic Policy Institute report.
Something needs to be done. But is continually raising the minimum wage the right answer with the fewest negative effects on outside parties?
The American people seem to think so. By 2014, according to a July 23, 2015 Pew Research Center Report, 73 percent of Americans and 90 percent of Democrats had agreed upon a policy to increase American salaries and reduce the stark income and wealth inequality that became manifest with the Occupy Wall Street movement.
But the agreement among economists is not nearly as unanimous. According to a November 2015 Employment Policies Institute study, nearly 75 percent of U.S. economists oppose hiking the minimum wage to $15 per hour. They argue that raising the price of labor lowers firm demand for employees, thus leading to greater unemployment and poverty. Many also believed, according to the study, that implementing a $15 federal minimum wage would disproportionately harm small businesses due to their insufficient financial resources to pay out such a wage.
The “Fight for 15,” as some have begun to call the movement, has notably been supported by former presidential candidate Senator Bernie Sanders (D-Vt.). As both an economic and moral imperative, he argues, the wage must be lifted to at least something resembling of a “living wage.”
Sanders’ propagation of the policy as well as grassroots support has granted the movement success in achieving its goals in recent years. On both the state and municipal levels ― albeit not the federal ― the minimum wage has been increased time and again.
Since January of 2014, 26 states and the District of Columbia have raised the effective minimum wage, according to the Economic Policy Institute. Additionally, 29 cities nationwide, including Los Angeles and New York City, have adopted minimum wages above that of their states. This November, four states will have laws designed to raise the minimum wage on the ballot.
But one state, South Dakota, is proposing a law to decrease the minimum wage for youth. The veto referendum, titled Referred Law 20, would lower the minimum wage from $8.50 to $7.50 for those under the age of 18. The official supporting argument observes that a higher minimum wage for minors “unintentionally price[s] the state’s youngest jobseekers out of the workforce,” something which has been confirmed by the nonpartisan Congressional Budget Office, according to the argument.
It makes sense ― how can young people acquire their first jobs if the value they provide to firms is not worth $8.50? Lowering the minimum wage to a “training wage” in the manner South Dakota proposed could allow teens to climb onto the first rung of the ladder. With a lower wage, more young people can gain the training they need to progress upwards.
Opponents of lowering the wage maintain that, despite the higher raise, the labor market of South Dakota continues to grow and unemployment remains low. In fact, these people frequently cite increased economic growth as a core benefit of raising the wage; to give employees, especially those lowest on the socioeconomic ladder, more purchasing power leads to greater consumer spending.
Less controversial than raising or lowering the minimum wage is an expansion of the EITC, a policy that has been supported by both Democrats and Republicans from Ronald Reagan to Bill Clinton, according to a March 4, 2014 piece in New York magazine. EITC is an alternative and superior approach for raising the wellbeing of the low to middle class workers in the U.S.
The EITC is a refundable tax credit for low- to middle-income individuals and families. In 2015, the program provided $69 billion to 28 million people.
The policy incentivizes work and always encourages working more. By design, any individual or family benefitting from the EITC is better off financially if they decide to increase their working hours because the credit increases incrementally as income increases until a set limit, which varies based on a person’s income and number of dependents.
According to the same November 2015 Economic Policies Institute poll, 71 percent of economists ― nearly the same percent of economists who oppose raising the minimum wage ― support an expansion of the EITC. According to a March 30 ABC News article, Steve Kaplan, a professor at the University of Chicago Booth School of Business, says that the EITC “gives low wage employees extra. It doesn’t reduce incentive for employer to hire, and it helps employees earn more.”
As of 2013, single adults could receive a maximum of just $487 per year, according to Tax Credits for Workers and Their Families. Under the age of 25, childless workers are ineligible for the tax credit. This hole in the program has been recognized by many, including President Obama and House Speaker Paul Ryan. As a result, according to the nonpartisan Center on Budget and Policy Priorities, “low-wage workers not raising children are the sole group that the federal tax system taxes into or deeper into poverty.”
Who are these workers anyways? The vast majority work in the service or food preparation industry. Many are young; nearly half of all minimum wage workers are under the age of 25, according to the Bureau of Labor Statistics. As a result, half of all minimum wage workers are currently not receiving any EITC; this needs to be changed.
With numerous benefits, the EITC is a viable alternative to dramatically increasing the minimum wage. A core component of the program is that it “boosts wages for workers at the bottom of the pay scale without putting their jobs or incomes at risk,” according to a Feb. 13, 2013 Wall Street Journal opinion piece reprinted by the Economic Policies Institute. In other words, since workers’ additional pay comes from the government and not from their employers, firms have no additional impulse to lay off workers, as exists with a raise of the minimum wage.
As one of the most effective programs that combats poverty, the EITC desperately needs expansion. In 2015, according to the nonpartisan Center on Budget and Policy Priorities, the EITC lifted about 6.5 million people out of poverty, including about 3.3 million children.
Hopefully today’s politicians will heed more attention to the EITC, a more economically sound policy than boosting the minimum wage.