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Tom Firey: A better way to help the working poor

April 10, 2013|By TOM FIREY

President Obama and some lawmakers in Washington and Annapolis have called for increasing the minimum wage, saying it would help the working poor. So far, those calls have gained little support, even on the left: Legislation to raise Maryland’s minimum wage was rejected by a state senate committee and federal legislation languishes in a U.S. Senate committee. That’s just as well, because raising the minimum wage is a feeble way to aid the working poor — and might be counterproductive. Besides, there’s a better way for government to help them.

The standard argument against increasing the minimum wage is that higher labor costs reduce employer demand for workers, resulting in fewer work hours and perhaps even lost jobs. Minimum-wage supporters deny this, saying studies show no harmful employment effects. They’re right that some studies claim that — but not many. The minimum wage has been heavily researched in recent decades and the overwhelming consensus is that it hurts employment — not a lot, and usually in the form of less hiring rather than layoffs, but the effect is real and concentrated among young and low-skill workers. It’s questionable whether a small increase in the wage is worth a small decrease in employment.

A second concern is that raising the minimum wage provides little help to the working poor. In 2012, only 1.1 percent of workers earned the federal minimum wage, including less than 0.4 percent of full-timers. (Another 1.4 percent of workers — including 0.7 percent of full-timers — earned sub-minimum wages, though they typically also earned tips.) Fifty-five percent of minimum-wage workers were younger than age 25 and the average minimum-wage employee worked 27 hours a week. Nearly half get a raise within one year.

Those numbers mean that relatively few workers earn the minimum wage, many don’t earn it for long, and they usually don’t work full-time. For the typical minimum-wage worker, President Obama’s proposal to increase the wage by 95 cents a year for three years would mean an annual increase of just $25.65 per weekly paycheck, before taxes. That’s not much help. Further, these workers typically aren’t heads of households — nearly two-thirds are in high school or college.  Roughly half of the workers who would benefit from the president’s proposal live in households earning $40,000 or more a year.

A third problem is that low-wage employers often have thin profit margins. For them, a government-mandated wage hike and the ensuing payroll tax increase are a heavy economic burden. Historically, those firms have passed part of the cost of minimum-wage hikes on to customers through higher prices.  But low-wage firms often have large low-income customer bases. It’s questionable whether a small increase in wages is worth a small increase in prices for the working poor.

Put simply, the minimum wage does a poor job of targeting aid to low-income households, it provides little help, it can reduce work hours and even jobs, and it is arguably unfair and economically harmful to employers and customers. It’s a very crude government intervention into the intricate and sometimes fragile arrangements between employers and workers. Fortunately, there’s a better way for government to help the working poor: increase the earned-income tax credit (EITC).

The EITC provides tax refunds to low-income working families — even if they owe little in taxes. The EITC’s costs aren’t heaped on low-profit-margin employers and their customers, but are shared progressively by society. And the EITC’s harmful employment effects are mild while its positive effects are strong: It encourages people to work.

The EITC is not without faults: It’s a “tax expenditure” — that is, it uses the tax code to disguise government spending. It dampens some recipients’ incentive to pursue better pay. Some might argue that the current EITC is already generous. And recipients don’t pay their fair share for the government services they receive.

Still, the EITC is a far better tool for aiding the working poor than a minimum-wage increase or other government welfare policy. If Washington and Annapolis politicians want to help the working poor, they should focus on the EITC instead of the minimum wage.

Thomas A. Firey is a senior fellow at the Maryland Public Policy Institute and a Washington County native.

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