A Living Wage



A Living WageIn a society as wealthy as the United States, if somebody is engaged in the equivalent of full-time work (e.g., one full-time job, two half-time jobs), they should earn enough to cover the basic needs (understood as having such things as enough to eat, clean water, clothing, shelter, basic medical care, transportation, and some entertainment). Several policy options exist to try to achieve that end. Because food, housing, and the like is more expensive in some parts, the amount of money required to pay for basic needs also varies by region. Two of these are the minimum wage and the earned income tax credit (EITC).The current federal minimum wage is $7.25 per hour, with state minimum wages minimum ranging from $5.15 (Georgia) to $11.00 (Massachusetts, Washington state). In some regions, the minimum wage is already slated to increase in future years up to $15.00 per hour.The EITC is a wage subsidy that effectively adds a tax refund payment to earned income to produce a higher overall household income. A single mother with two children with a full-time job throughout 2016 earning the current Federal minimum wage will have $15,080 in earned income, and qualify for an earned income tax credit of $5,572. This would be a combined income of $20,652 – the equivalent of 9.92 per hour.The Minimum WageThe standard argument against a minimum wage appeals to a standard principle of liberty. If one person is willing to receive $5.00 for an hour of work, and another is willing to pay it, then it is intrinsically wrong to come between them. One could respond that this intervention comes in the name of exploitation – coming from the fact that the potential employee faces desperate circumstances (hunger for themselves or family members, homelessness, needed medical care) and the potential employer does not. A potential employee’s wage cannot be considered freely agreed to unless those basic needs are otherwise protected. However, this response is is blunted by the employer’s option to pay nothing, whereby the intervention makes the worker even worse off. In the name of preventing exploitation, the intervention may force the worker to accept the desperate circumstances she was trying to avoid.A recent report from the Federal Reserve Bank of San Francisco estimates that the effect of a 10% increase in the minimum wage would result in a 1% to 3% loss in employment for the target population. If we assume a 2% loss of jobs among minimum-wage workers with a 10% increase in the minimum wage, it follows that an increase would help 98% of the workers in that range. Those workers would not be forced to accept the desperate circumstances they were trying to avoid – they would be helped to further distance themselves from those desperate circumstances. But for the other 2%, the results would be catastrophic. Furthermore, this 2% will be made up of people who already have employment disadvantages such as implicit and explicit bias, health issues, insufficient or low quality education, and family commitments that interfere with work schedules.Even if total employment does not decrease, there is an issue with job transfer. A higher minimum wage makes these jobs more attractive to the voluntarily unemployed in middle-income households seeking additional income. These workers are generally more highly skilled and tend to suffer from many of the employment disadvantages of current minimum-wage workers. Consequently, businesses have an incentive to replace their current minimum-wage employees with these alternative employees – providing its benefits to middle-income households rather than the poor.Up until 1994, there was a consensus among economists that an increase in the minimum wage would decrease employment. The vast majority of households with minimum-wage workers would benefit from the increase, but some households would suffer potentially catastrophic economic results from those who lost their jobs.At that time, David Card and Alan Kruger published a study that compared the employment effects in one state that increased its minimum wage, with an economically similar state that did not increase its minimum wage. By using the former state as a study group, and the latter state as a control group, they could control for some confounding variables. Their study showed a slight increase in employment, rather than a decrease.Possible explanations for this include (1) lower-income households tend to spend their additional income on goods and services which, in turn, create additional jobs, and (2) employers generally would be willing to pay the higher wage but do not do so because the economic power they have over potential workers desperate for a job.Attempts to replicate their findings have produced mixed results. More importantly, they have produced no consensus among economists as to the employment effects on employment. In 2014, when the Congressional Budget Office (CBO) drew upon the consensus of economists to estimate the effects of raising the minimum wage to $10.10 per hour, it estimated that it would reduce total employment by 500,000 jobs. At the same time, they estimated that the $10.10 minimum wage would give households below the poverty line an additional $5 billion, and households between the poverty line and three times the poverty level an additional $12 billion. This additional income produces the side effect of stimulating those businesses that provide goods and services to lower-income households, as opposed to businesses that cater to the very wealthy.What we do know is that an increase in the minimum wage will help a significant percentage of those households earning less than what would be the new minimum wage. However, there is a risk (though it is not certain) that a percentage of low-income households will suffer catastrophic economic hardship through loss of employment, and that these costs would fall on workers who have employment disadvantages.Recently, several states and municipalities have increased their local minimum wage. This will provide fertile ground for research.Even if this research shows a negative employment effect, we must address the question of whether the best way to address this effect is with a policy that not only places the whole financial burden on the poorest workers, but also profits those who least need the money. Using the CBO’s 2014 figures for a $10.10 minimum wage for illustrative purposes, protecting 500,000 low-income jobs by refusing to raise the minimum wage means that the financial burden for protecting the interests of these people falls on households with the lowest income (a loss of $17 billion), while providing the very wealthy with an increase of $17 billion in profits.Earned Income Tax Credit (EITC)The EITC answers several of the challenges made to the minimum wage.(1) The benefits go exclusively to low-income households, whereas much of the benefit of a higher minimum wage goes to middle class and even upper class households with members seeking a second source or independent source of income.(2) It does not give employers an incentive to fire workers since the cost of employment to employers remains constant. In fact, it has been argued that the EITC provides a subsidy to employers who hire workers from low-income households because a part of their wages is paid through the wage subsidy rather than the business.(3) It does not give the voluntarily unemployed in middle-class households an incentive to enter the labor force seeking additional income – taking job opportunities from poorer heads of household.(4) The financial burden can be placed entirely on the very wealthy individuals and corporations through direct taxation, rather than burdening smaller and struggling businesses.The EITC, as it is currently being implemented, has two significant problems.One disadvantage with the earned income tax credit as currently designed is that those who qualify get a lump-sum payment when they file their taxes after a year of hardship. Some low-income households lose a percentage of that assistant by borrowing against it in the year of living on low wages. Or they must put off important purchases, such as medical care or home repairs, until the money comes in.Another disadvantage comes from the bureaucratic red tape associated with the program. A worker needs to know that she is eligible to apply for the assistance. The IRS has an online "EITC Assistant" to help people decide if they qualify and for how much.The EITC is not an alternative to a higher minimum wage. In fact, the EITC and minimum wage can work together. An increase in the minimum wage provides households with additional earned income, which, when combined with the earned income tax credit, provides the household with greater overall income. If the single mother at the start of this entry received a pay increase due to a higher minimum wage to $10.50, she would still qualify for $4,806 earned income tax credit for a total income of $26,646 - an income equivalent of $12.81 per hour.Policy ProposalsIn principle, PORP supports the objective that anybody working the equivalent of a full-time job earn enough to cover basics needs. We support the use of both an increased minimum wage and increased earned income tax credit to accomplish these ends. Recognizing that there is a risk of a possible employment effect due to a higher minimum wage, we favor alternatives for dealing with these effects that do not place the financial burden on the poorest workers. This would include options such as wage subsidies for people who face employment disadvantages such as health issues, language, education/training, and implicit and explicit bias. We support improving the EITC by arranging for qualifying workers to get their benefits throughout the year, and simplifying and expanding the eligibility requirements. ................
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