After Sen. Bernie Sanders introduced his bill to raise the federal minimum wage to $15 earlier this year, the nonpartisan Congressional Budget Office projected the legislation could cost up to 2.7 million jobs nationwide. Raising the minimum wage would create a costly tradeoff – some would get a pay raise, but many would lose their jobs altogether.
A survey of labor economists in 2019 found that three-quarters opposed raising the federal minimum wage to $15 per hour, and a majority believed that the Earned Income Tax Credit (EITC) would be effective at raising wages for those in poverty. Only 6% believe the same thing about a $15 minimum wage.
The Earned Income Tax Credit is a wage supplement that adjusts based on an employee’s income, marital status, and number of children – meaning benefits are more accurately targeted to deliver increased income to those who need it most. The amount of the credit is based on a percentage determined by these factors, and therefore incentivizes employment, increases income, and alleviates poverty. On the contrary, a flat minimum wage increase is ineffective at directing benefits to poor families, and does not adapt to fit employees’ unique needs.
- Minimum wage hikes don’t help those who need it most. Various studies have demonstrated minimum wage policy’s poor track record at boosting incomes of poor families.
Many poor individuals do not work, and minimum wage hikes will not affect them.
Minimum wages are poorly targeted to deliver higher income to poor individuals who do work, with a large portion of benefits going to workers above the poverty line. Recent data shows the average family income of a minimum wage earner was $56,982 in 2019, and nearly half of minimum wage workers affected by an increase had family incomes more than three times the poverty line.
The large majority of studies on minimum wage demonstrate minimum wage hikes cause employment loss.
- EITC programs boost employment and incomes for poor families.
A 2015 study published by the National Bureau of Economic Research analyzed the impact of the earned income tax credit on employment and income of single mothers with children. The researchers found expanding the EITC by $1000 would raise employment in this demographic by 7.3%.
Studies conducted on previous expansions of the earned income tax credit found the 1980s expansion increased the labor force participation rate of single mothers by 2.8 percentage points, and a 1990s expansion as part of a larger welfare reform effort resulted in a 7.2% increase in labor force participation. Another study published in the National Tax Journal found that state EITC programs, which create additional benefits on top of the federal credit, are also more efficient at delivering increased income to poor families.
- EITC programs are significantly more effective at raising families out of poverty than minimum wage hikes.
Analysis by David Neumark for the Federal Reserve Bank of San Francisco finds raising the minimum wage to $15 per hour would only deliver 12% of increased income benefits to poor families, while 38% of benefits would go to families with incomes at least three times the federal poverty line. This, coupled with the reality that steep minimum wages kill millions of jobs, reaches the conclusion that raising minimum wages do not reduce poverty rates. A review of economic studies on this topic concludes there is no statistical relationship between minimum wage hikes and poverty reduction.
On the contrary, Neumark finds expanding the earned income tax credit corresponds with increased poverty reduction rates: increasing the phase-in rate of the EITC by 10% reduces poverty of single mothers by 1.6 percentage points. Other research from researchers at the University of California-Berkeley and the U.S. Department of the Treasury projected increasing the credit by $1,000 would reduce the share of families below the poverty line by 9.4%.
Many companies are struggling to fill open positions while still recovering from the effects of the pandemic. More than doubling the federal minimum wage would skyrocket labor costs for employers, resulting in millions of lost job opportunities for workers. Instead, expanding the earned income tax credit would bolster employment and income for workers, and send targeted income boosts to families at or below the poverty line.