Tax Credit More Effective Than Wage Raise to Fight Poverty

This logic is very appealing. I drink a lot of diet Coke. If the price of diet Coke went up 40 percent, I would drink a whole lot less of it. Why would the market for diet Coke be different from the market for labor?

Conservatives should acknowledge that that question has sensible answers. Perhaps instead of cutting back on workers, firms will simply increase prices. Perhaps firms will neither increase nor cut back on workers, but instead will make do with smaller profits.

Ultimately, this is an empirical question. And here again, we have disagreement among economists. A recent poll of some top academic economists asked them whether raising the minimum wage would make it “noticeably harder for low-skill workers to find employment.” About one-third agreed, one-third disagreed, and one-quarter were uncertain.

Count me among the economists who think that it would. My holistic judgment — which is informed by economic theory, the existing empirical economics literature and basic common sense — is that raising the minimum wage by 40 percent, as President Obama and many Democrats want to do, will make it noticeably harder for low-skill workers to find jobs.

The non-partisan and highly respected Congressional Budget Office agrees with me. Analyzing the president’s proposal, the CBO found that raising the federal minimum wage from the current $7.25 to $10.10 would cost hundreds of thousands of jobs.

That’s high price to pay. What benefit would we get for that cost?

Well, many workers would get higher paychecks. The CBO estimated that these extra earnings will total $31 billion.

But it turns out that 29 percent of the $31 billion of those extra earnings would flow to families with household earnings of more than three times the poverty level. Only 19 percent of the $31 billion of extra earnings will accrue to households below the poverty line.

This demonstrates that the minimum wage is a terribly targeted anti-poverty program.

Why? Because the minimum is agnostic to the household income of workers. I earned the minimum wage as a kid in a middle-class family. Raising the minimum wage would have given my family a very slight income boost, but it wouldn’t have taken us out of poverty because we weren’t in poverty.

Conservatives should support the government ensuring that no one who works full time and heads a household lives in poverty, by opposing the minimum wage increase in favor of a better targeted anti-poverty program.

One such program is the Earned Income Tax Credit, which is a federal subsidy for low-income, working households. It is a remarkably effective anti-poverty program because it targets household income. And it provides an incentive for people to work because it is only offered to working households.

The IRS estimates that in 2009 the EITC lifted nearly 7 million people out of poverty. Right now the EITC is not nearly generous enough for workers with no children. Instead of increasing the minimum wage, the childless EITC benefit should be expanded.

Liberals are wrong that the customers and employers of low-income workers should bear the responsibility of lifting the working poor out of poverty. Google and Microsoft, me and my AEI colleagues — all of society — should pitch in as well.

The EITC channels social resources to meet a social goal. And it does so a … lot better than the minimum wage.

This article appeared in print on page 10 of the May 6th, 2014 edition of Hamodia.