The EITC vs. the Minimum Wage

Here's a study on the Earned Income Tax Credit (EITC) from the Federal Reserve Bank of Atlanta. Some statements that caught my eye:

[W]e found that nearly 20 percent of every EITC check ends up with health care providers.

The number of eligible persons who fail to claim the EITC is estimated at 25 percent of those currently receiving the credit.

The study paints the health care spending as a good thing because it stimulates the local economy, but the fact that almost $1 out of every $5 received goes to health care is notable. As the study says, this is "critical knowledge at a time when the industry struggles to recover the cost of treating higher-risk patients." The low enrollment rate is notable as well since it cuts into the effectiveness of the EITC. Enrollment is not a problem with the minimum wage.

Recent discussions about minimum wage legislation have prompted many comparisons of the EITC to the minimum wage in terms of their relative abilities to help low-income households. For example, the CBO just issued a report looking at this issue. The WSJ's Washington Wire reports:

Minimum Wage vs. Earned-Income Tax Credit, Washington Wire:  Which does more for low-income families? Raising the minimum wage or sweetening the earned-income tax credit, a cash bonus paid to certain low-income workers?  ...[T]he Congressional Budget Office offered this tentative answer, based on the government’s 2005 Current Population Survey.

Raising the minimum wage to $7.25: About 18% of the 12 million workers who were paid between the current minimum wage and $7.24 an hour were in families that had cash income below the federal poverty ceiling in 2004. Had all of the workers in that wage range, instead, received $7.25 per hour, they would have gotten about $11 billion in additional wages in that year. About 15% of those additional wages ($1.6 billion) would have been received by workers in poor families.

Sweetening the EITC: It depends on how exactly Congress changed the law, of course. Increasing tax credits (and thus cash payments to those who don’t owe any taxes) for childless workers and increasing the credits for families with three or more children, would have cost $2.4 billion in 2004, with workers in families below the poverty line receiving $1.4 billion of that.

But CBO cautions there are lots of ifs, ands and buts here. “The analysis is subject to a number of limitations” it CBO said. Among them: “Some employers of workers already paid at or just above the new minimum wage rate might increase those workers’ wage rates as well” and “the CPS does not contain all of the information needed to compute the EITC, limiting the accuracy of those estimates.”

So the answers aren't as clear as many supporters of EITC have implied. Still, purely on an economic basis, I agree that the EITC has the upper hand - it's a better anti-poverty device. But a tool still in its box on a shelf in the shed does us no good and the politics associated with the EITC make it much less likely it would be enacted as compared to the minimum wage.

I don't think Democrats should oppose the EITC, but it shouldn't get in the way of what is politically feasible. Do what we can for the poor while we can - pass minimum wage legislation and then, before inflation erodes it away again, let's see if we can't find a way to use both politics and economics in our favor to expand the EITC. I think I can sign onto this statement by Brad DeLong that he made in 2004:

Now I like the EITC. Come the Day of Wrath, my best pleading will be the role I played in 1993 in the Clinton administration in expanding the EITC. But the EITC is a program that uses the IRS to write lots of relatively small checks to tens of millions of relatively poor people who satisfy picky eligibility rules. This is not the IRS's comparative advantage. The IRS's comparative advantage is using random terror to elicit voluntary compliance with the tax code on the part of relatively rich people. The EITC is a good program, but it a costly program to administer, and it is administered imperfectly to say the least.

The minimum wage, on the other hand, is nearly self-enforcing: its administrative costs are nearly nil, for workers (legal workers, at least) have a very strong incentive to drop a dime on bosses who violate it. From a government-administrative and error-rate perspective, it's a very cost-effective program.

The right solution, of course, is balance: use the minimum wage as one part of your program of boosting the incomes of the working poor, and use the EITC as the other part. try not to push either one to the point where its drawbacks (disemployment on the one hand, and administrative error on the other) grow large. Balance things at the margin.

Balance things at the margin instead of choosing among polar extremes? What a novel concept, though politicians do have a fondness for polarization. Brad also notes that:

[T]he incidence of the minimum wage "tax" falls almost entirely upon the customers of firms that employ minimum-wage workers, and that's pretty much all of us. It's not as though the owners and managers of firms that employ minimum-wage workers have no other options. So I believe ... the burden of the minimum wage is broadly distributed across all taxpayers.

Here's the Atlanta Fed study I mentioned at the onset. It's a localized study, but because of that it's also very detailed:

EITC Boosts Local Economies, FRB Atlanta: For 31 years, the federal Earned Income Tax Credit (EITC) has been a fixture in the nation's arsenal of anti-poverty programs. In addition to bringing more children above the poverty line than any other federal program, the EITC has become a formidable and efficient generator of economic stimulus for U.S. cities.

A newly released study funded by the Nashville Wealth Building Alliance documents the EITC's growing fiscal influence in metropolitan areas, focusing research on Nashville, Tenn. In addition to examining the economic impact of the EITC, the study also performed a geographic analysis to assess the EITC's role in individual neighborhoods, providing useful market data on low-income households for use by anti-poverty program administrators.

Defining the local impact of federal programs
The EITC has become one of the top three federal assistance programs, adding millions of freely-expendable dollars to any given region's low-income labor force. The tax credit has boosted labor productivity among its recipients and increasingly replaced their dependence on less efficient state and local welfare administrations. This is good news for everyone, rich or poor. However, most federal studies of the policy's impact fail to quantify these local or regional benefits.

A regional "input-output" model, like the one used in this study, details some significant benefits to the local economy when federal money is recycled into local consumer spending. For example, we found that nearly 20 percent of every EITC check ends up with health care providers; the credit's addition of $34 million in annual revenue from low-income clients to local providers is critical knowledge at a time when the industry struggles to recover the cost of treating higher-risk patients.

Economic impacts of the federal EITC in Nashville
"The State of the Earned-Income Tax Credit in Nashville" is one of only a handful of studies nationwide that takes a detailed look at the impact of these large, efficient monetary transfers on a metropolitan economy. Using taxpayer data from years 1997-2004, the study found a robust economic output response that added to business revenue as well as significant increases in job creation as a result of EITC-supported household expenditures.

The EITC also contributed to expenditures on health care, electric bills, big-ticket retail purchases and family outings to local restaurants, thus generating "multiplier" effects that reverberate through the local economy and become income for other local businesses, employees and governments.

Including these multiplier effects, the EITC provided $81.8 million in economic output to Davidson County-Nashville during 2005. Over the 8-year period analyzed by the study, these output impacts totaled $642 million. When the study area was expanded to the Nashville Metropolitan Statistical Area (MSA), the EITC brought in over $1.25 billion in economic stimulus.

The multiplier for EITC-recipient expenditures was 1.07: each EITC dollar spent in the Nashville economy produced that dollar plus an additional seven cents in economic output. Even though some EITC dollars are spent on goods and services produced outside the region, local employers and employees benefit nonetheless.

Over a third of the local EITC money received is converted to salary and wage earnings for Nashville-area residents, many of whom are low-income and likely eligible for the EITC themselves. Of the 708 jobs (full-time equivalent) in Davidson County that were created by EITC expenditures in 2005, 150 were in retail, earning an average of $31,348; 81 were in accommodations/food services, earning an average of $20,769; and 80 were in other service-oriented business, earning an average of $19,881. EITC benefits also support high-income employment as well; the health/social services industry benefited from $15.9 million in additional industry output and a total of 132 jobs within an average salary of $69,301.

In fact, the health care industry was the largest beneficiary from Davidson County with $16 million in additional revenue; in the 8-county metropolitan area, these EITC-dependent revenues rose to $34 million. Retailers in Davidson County and the Nashville MSA brought in an additional $10.5 and $22.5 million, respectively. The local financial, wholesale and real estate/rental industries registered $5 to $7 million for Davidson County and $11 to $14 million for the MSA.

The broader picture suggests EITC has helped smooth consumer spending in Nashville through the economic downturn of 2000-2002. The size and amount of disbursements from year to year proved sensitive to general macroeconomic conditions, tending to expand and contract in opposition to annual changes in economic growth.

As illustrated in the graph, Nashville's EITC disbursements declined in the three years following 1997, tracking across-the-board economic gains until 2000 when the Dow Jones Industrial average started its three-year fall. Strong growth in the Nashville EITC from 2000-2002 continued to track heavy losses in the market and flattening U.S. personal incomes. However, personal incomes in Nashville defied expectation and continued to rise (albeit at a slightly slower pace) as if little had happened. Despite mismatches between the EITC and personal income over the eight-year snapshot, in general the credit's counter-cyclical growth has cushioned the softening economy's blow to the region, its low-skilled labor force and businesses that depend on a healthy middle class.

Conclusion
Though the positive economic impacts to cities like Nashville are robust, the EITC remains underutilized. The number of eligible persons who fail to claim the EITC is estimated at 25 percent of those currently receiving the credit. Failure to collect the EITC has cost Nashville an estimated $19.9 million in total economic output. Thus work remains to ensure that no low-income household leaves this credit "on the table."

Comments

[Bruce Webb]

There has been some blurring between being "poor" and being "below the poverty level". This for example is somewhere between misguided and misleading:

"About 18% of the 12 million workers who were paid between the current minimum wage and $7.24 an hour were in families that had cash income below the federal poverty ceiling in 2004."

Well lets sharpen our pencil and see what that means. The official poverty level for a family of 4 is $20,000.
http://aspe.hhs.gov/poverty/06poverty.shtml
If we take a couple with two kids and each works a full-time minimum wage job their combined income is $21,424. Presto by definition they are not living below the poverty ceiling. This doesn't magically transform them into suburban teenagers working for gas money as so many commenters would have it.

It would be interesting indeed to see what happens to that 18% figure if you just reset the poverty level for a family of four to $22,000, just over two full time minimum wage jobs rather than at $20,000 which is just under.

The math remains the same if you have one parent at 40 hours, another at 10 hours and two teenagers at 15 hours each. Nope that family is not poor at all.

The Federal poverty level is a trigger point for eligibility for certain government benefits. To simple-mindedly use it as a proxy for being "poor" is frankly absurd. The notion that two people working full-time and only grossing $1785/month (pre FICA & Medicare) are not poor simply because the are fractionally above an arbitrary threshold is to ignore the realities of making rent, paying for utilities, buying food, and commuting.

(If 'cash income' alternatively means something like 'net pay' then the numbers change a little, but by including hourly rates up to $7.24 you are going to mathematically drive many poor households to points right above that $20,000 even with FICA and Medicare removed)

[Sam Thornton]

The primary objection I see to EITC is that it amounts to an indirect subsidy, and hence an enabler, for employers who insist on paying substandard wages.

Why should taxpayers subsidize rapacious employers? If a business is so frail that it can't survive without paying wages that fall below poverty level, why should it not fail?

[Bruce Wilder]

Isn't the EITC, effectively, a subsidy for low marginal productivity employment?

Would that ever make any sense?

I am not questioning the need to aid the poor, but why do we want to "aid" employers to do the wrong thing?

[MikeB]

Bruce,
Low marginal productivity is in part a result of low skills of the employee. We precisely DO want to encourage employers to hire people with low skills, because otherwise they may be unemployed. The EITC makes it economically preferable to take low wage jobs in comparison to unemployment, where marginal productivity is zero.
Mark,
The min wage is more feasible than more EITC? I thought the good guys now have a majority in both houses, and in the past a good number of Republicans have supported EITC. I would rather increase the EITC, and minimize the risk to low-skilled young people who are the most vulnerable to the negative employment effect of the min wage, and who most need an entry into employment.

[Peter Schaeffer]

Mr. Thoma,

I favor higher wages, including much higher minimum wages, versus the EITC. In my opinion, American society has given up on paying decent wages and is extending the welfare state (EITC, etc.) instead. Sadly, much of the left has embraced this idea. See Wal-Mart: A Progressive Success Story for an example of this kind of thinking. See Cheap-labor Liberalism: How the Democrats Mutated into a Socially-Liberal, Economically-Conservative Party for a critique. Of course, the cheap labor right loves it, as long as the costs are paid by someone else.

In my view, work related welfare systems (EITC, etc.) are not a proper substitute for decent wages and benefits. My arguments are as follows:

1. The current system fails to properly distinguish between work related compensation and general handouts. Too many of the benefits (WIC, food stamps, Medicaid, public housing, EITC) are available irrespective of whether the recipient works or not. A good system has bright-line distinctions between the deserving and those who are not. A wage based system works well. You are paid well if you work. You get nothing if you don't. Work+, simply doesn't make that clear.

2. The current system is very complex and costly to administer. Numerous studies have shown that many of the working poor don't collect the benefits that they are actually entitled to. Why? They find the bureaucracy daunting, the forms are hard to fill out, they can't take time off to visit government offices, etc. A wage based system has none of these problems and no administrative overhead.

3. The current system is also highly corrupt. The same studies that show limited participation in benefit programs also reveal large scale fraud. EITC fraud is legendary. Indeed, most (by count) IRS fraud claims are apparently EITC based. Given the hazy work relationship between who is eligible and who isn't the prevalence of fraud is not surprising.

4. The current system imposes massively excessive marginal tax rates on the working poor. This is inevitable in any system based on means tested wage assistance. How high the rates are, is not entirely clear. Different sources give different numbers. Since the rules change over time, this is inevitable. However, every source comes up with very, very high values. Many sources suggest that marginal tax rates for the working poor are over 100%. Notably, these conclusions span the political spectrum. A left-of-center source might be Effective Marginal Tax Rates on Low Income Households. Two right-of-center sources are Marginal Tax Rates on the Poor, Due to Phase-out of Welfare Benefitsand Taxing The Poor. Once again a wage based system has none of these problems.

5. Some studies show that EITC payments are not well spent. Clearly there are some class and value issues issue here. What exactly does well spent mean? If the money was blown on drug/alcohol binges most folks would agree that such outcomes were not ideal. However, the truth is more complex. Much of the money appear to be used for large consumer purchases (furniture) rather than spent gradually on other things such as better housing. This is obviously a grey area. However, the critics don't appear to be condemning the EITC per se. They are suggesting that other mechanism might work better.

Higher wages (and assured benefits) don't have any of these problems. We (the American economy) should just pay them. Of the above points 5 is probably the weakest followed by 3. However, 4, 1, and 2 are very, very serious matters. Raising wages and mandating benefits would avoid all of this.

[Movie Guy]

The Atlanta study is interesting.

As you pointed out, particularly this:

"For example, we found that nearly 20 percent of every EITC check ends up with health care providers; the credit's addition of $34 million in annual revenue from low-income clients to local providers is critical knowledge at a time when the industry struggles to recover the cost of treating higher-risk patients."

[Bruce Webb]

The Economic Right is trying to do two things with the EITC/minimum wage thing or actually the same thing two different ways. One is to move the rhetoric from "fair wages" to "helping poverty". The other is to preserve the illusion that wage markets at the bottom clear right at the point of efficiency. That the current system is not based on any kind of employer pricing power, instead wages are being set right at the proper level given their marginal product.

It all goes back to pie slices. They stubbornly insist the the pie is being sliced optimally by the Invisible Hand and if that bothers you, well fork over a piece of your slice. Anything but actually reallocating the pie with a realistic eye on relative contribution to productivity.

There was a commenter that "explained" that since you could explain most of the productivity expansion of the seventies, all credit for that productivity should go to the guy that cut the check to buy the hardware and software. Which was kind of a slap in the fact to the inhouse programmers that actually made the tech work. Or for that matter the secretary who updated her skill set to use the new tools.

Well it is not about aiding the poor, its about excercising some control over the productivity pie slicer. Because the people slicing the pie now really need some portion control.

[Peter Schaeffer]

MikeB,

The U.S. isn't suffering from any shortage of jobs for low-skill workers. See the various threads on immigration.

[Bruce Webb]

Mike B: "Low marginal productivity is in part a result of low skills of the employee."

"I would rather increase the EITC, and minimize the risk to low-skilled young people who are the most vulnerable to the negative employment effect of the min wage,"

You are asserting what actually needs to be put in evidence. I don't believe that low level wages are being set by the marginal productivity. I believe another recognized (in reality world) economic principle is in play: "What the market will bear". Employers pay their employees as little as they can get away with and charge their customers as much as they can get away with because that is how you maximize your margins.

Nor do I believe that higher minimum wages have that negative employment effect you reference.

Arguments drawn from theoretical models that ignore how businesses actually operate are not a priori persuasive to me. Just because it sounded good in Econ 101 doesn't validate it. Where is your real world evidence for either?

And I find the blind equation of "low wage" to "low skill" fairly interesting in and of itself. It tends to valorize the kinds of skills you get in school over the ones you get on the job. Anyone that has ever had to train that new supervisor with the newly minted MPA or MBA will know what I am talking about. And don't even ask machinists about engineers. Or Navy Chief Petty Officers about Ensigns.

[anne]

"In my opinion, American society has given up on paying decent wages and is extending the welfare state (EITC, etc.) instead. Sadly, much of the left has embraced this idea."

Rubbish, simple rubbish. House of Representative Democrats this week passed a significant minimum wage increase unanimously. Got it, unanimously? Sat what?

[anne]

"In my opinion, American society has given up on paying decent wages and is extending the welfare state (EITC, etc.) instead. Sadly, much of the left has embraced this idea."

Then support minimum wage legislation as all the Democrats in the House of Representatives did, and fight against Republican attempts in the Senate to delay or distort or defeat minimum wage legislation. Not to mention fight against attempts by the Republican President to distort minimum wage legislation.

Oh, and support unions as Democrats do.

[anne]

"[W]e found that nearly 20 percent of every EITC check ends up with health care providers."

A simple understanding of why the remarkable strike by Houston janitors was for both an increase in wages and for medical benefits. And, they won won won.

[anne]

http://www.nytimes.com/2006/11/21/us/21janitor.html?ex=1321765200&en=f139e42d0ca84d0a&ei=5090&partner=rssuserland&emc=rss

November 21, 2006

Cleaning Companies in Accord With Striking Houston Janitors
By STEVEN GREENHOUSE

Houston's major cleaning companies and the union representing 5,300 janitors there announced a tentative contract yesterday that ends a monthlong strike, raises the workers' hourly wages by nearly 50 percent over two years and provides them health coverage.

Under the three-year deal, the first for the janitors since they unionized last year, their pay, which now averages $5.25 an hour, will increase to $6.25 on Jan. 1, 2007; to $7.25 on Jan. 1, 2008; and to $7.75 on Jan. 1, 2009.

Further, the employers agreed to increase a janitor's typical shift to six hours a day, from four. Many of the janitors had said they were being given too few hours of work to support their families.

As a result of the rise in both hourly pay and the hours in the workweek, the employees expect to see their paychecks double over the next couple of years.

"It's a moment of great victory," said Mercedes Herrera, a janitor for five years who earns $5.15 an hour. "We all came together, and the union gave us strength. Many of us have never received a raise. I've earned the same ever since I started, so the raise is great." ...

[marcel]

Peter Schaeffer (Jan 13, 2007 11:45:05 AM) wrote:
In my opinion, American society has given up on paying decent wages and is extending the welfare state (EITC, etc.) instead.

I have always been under the impression (mis-impression?) that the EITC is pretty much the way we have chosen to implement Milton Friedman's negative income tax. I'm skeptical that he would have been willing to propose anything that could reasonably be tagged as socialist.

Too many of the benefits (WIC, food stamps, Medicaid, public housing, EITC) are available irrespective of whether the recipient works or not.

It's called an Earned Income tax credit because (at least as I understand it) it's only eligible to those who work. You have to earn, presumably by working, a minimum amount per year to be eligible.

EITC fraud is legendary. Indeed, most (by count) IRS fraud claims are apparently EITC based. I think you are right: EITC fraud is the stuff of legend. I suspect this has to do with the way the IRS currently devotes it anti-fraud resources, following congressional directives: on EITC, which are nickel and dime frauds, rather than to corporate and upper class frauds, where the real money is.

[anne]

Remember, Martin Luther King was killed in Memphis while marching and speaking in support of striking sanitation workers. I am sure he would have been in Houston as well, and applauding the House of Representatives on the minimum wage and asking for helath care from here.

[Ninjaplease]

http://news.bbc.co.uk/2/hi/business/6249117.stm

Subsidies for all!!! YAY EITC!!!

[Movie Guy]

Peter Schaffer - "I favor higher wages, including much higher minimum wages, versus the EITC. In my opinion, American society has given up on paying decent wages and is extending the welfare state (EITC, etc.) instead. Sadly, much of the left has embraced this idea."

anne - "Rubbish, simple rubbish. House of Representative Democrats this week passed a significant minimum wage increase unanimously. Got it, unanimously? Sat what?"

Peter, you are correct in my judgment. I was going to respond to your point earlier, but decided to make a few calls to friends to discuss your point. We arrived at the same conclusion.

There is no single, strong, nationwide lobbying force or effort to focus attention on the problems of decent wages, declining real wages, declining standards of living among many Americans, corporate welfare subsidies, and U.S. trade policies.

The Reform Party that supported Ross Perot in 1992 came close to mounting such a national movement, with Perot garnering nearly 20 percent of the popular vote, but that political movement has lost steam...and power.

Instead of a political party, I suggest that those dissatisfied form a nationwide lobbying effort to raise these employment and trade issues with members of Congress, Administration, employment and trade unions, and all other organizations.

If there was a nationwide lobbying organization named the American People's Association or United States National Association of Americans or United States National Association of American People which mounted continuous national campaigns in addressing these issues, the size of the membership base (open to all citizens), support funding, and national presence could make a difference. But such an encompassing national organization does not exist.

I would gladly support the USNAAP.

The acronym, USNAAP, is not presently in use according to Google.

[Peter Schaeffer]

Anne,

Please don’t try to pull the wool over our eyes. The new minimum wage will reach $7.25 in 2009. However, the minimum wage was $9.29 back in 1968 in 2006 dollars. In other words, the Democrats are proposing a (much) lower minimum wage 41 years after the peak. Check out Minimum Wage in Current and Constant (2002) Dollars.

I will believe the Democrats support unions when they start enforcing our borders. The linkage between Open Borders and union decline is very clear. See Unions Weakened During High Immigration if you don’t believe it.

Perhaps an article from the New York Times might help. See Here Illegally, Working Hard and Paying Taxes. A few quotes

“Starting about 30 years ago, as illegal immigration began to swell, building maintenance contractors in big immigrant hubs like Los Angeles started hiring the new immigrant workers as part of a broader effort to drive down labor costs. Unions for janitors fell apart as landlords shifted to cheaper nonunion contractors to clean their buildings. Wages fell and many American-born workers left the industry.”

“In New York City, janitors cleaning commercial buildings make $19 an hour. Mike Fishman, president of the Service Employees International Union's local in New York, points out that the union never lost ground in the city, and it is still unusual to find illegal immigrants cleaning office buildings there.”

“In Southern California, by contrast, unions were decimated in the 1980's, and only started recovering in the late 1990's. According to Mike Garcia, president of the union's main local in the state, Southern California's unionized janitors earn between $8.50 and $11 an hour.”

Let me ask a simple question “Which side are you on?”

[Brian]

Wasn't it Bill Clinton who said that "those who work hard and play by the rules" shouldn't have to live in poverty? That's the way to sell it to the public.

And correct me if I am wrong, but didn't at least one oil company receive more than $2.4 billion in subsidies in 2006? If that's the case, then the simple comparison should do the tick as well.

[anne]

Open Borders, we have the lunacy of open borders as opposed to closed borders because open borders are bad bad bad when they are open and closed borders are good good good unless they are open and then they are bad bad bad. Open borders or is it OPEN BORDERS. Imagine the lunacy.

[evagrius]

"I favor higher wages, including much higher minimum wages, versus the EITC. In my opinion, American society has given up on paying decent wages and is extending the welfare state (EITC, etc.) instead. Sadly, much of the left has embraced this idea."

EITC is a rather big joke if looked at closely. It's a horribly complicated tax return system with quite a few little nooks and crannies, designed for mainly people with children, full time parents. It's income/ poverty level related and very restrictive on what is allowed and not allowed. It's confusing to the applicant and to the tax preparer. It was, last that I know of, administered through a computer program designed by Perot's company.
It's essentially a way of subsidizing cheap employers.
I would not call it an extension of the welfare state. It's rather an addendum, an extra intrusion on people's lives, more hassle. It rewards bad employers and subsidizes very weak lower level employment and, considering that the top 1% don't pay their share of taxes, it rips off the middle class to give to the poor.

[js paine]

as long as we have immigration
we'll need a wage floor
regardless of how the eitc gets goosed

as to non job related benes
in the absence of immigration
those would raise market wage rates

the better your household
can live
without a job
the more it takes to hire you to do one

no job markets don't clear

and firms try to pay
profit max wages
not
wages
equal to marginal value added

64k question
can job market forces
these two close together ?????

as to optimal job scarcity
and efficiency wage max

that amounts as much to
groping collectively
for an optimal level of excess job seekers
as it does
that each job's wage rate
for each jobbler
is enough better
then the expected value
of the next best job
to make the greasey bastard work his tail off

---------------

peter s :
why do i
----on occasion----
sense a benthamite gradgrind like
calc heart
nearly "two sizes too small "
beating away slowly inside u ???

bright
informed
like to think
and communicate ....
god knows i'd hate to believe it's true

[js paine]

eitc is a very fine welfare system for a culture
who's middle income majority
has a job it dislikes and wants every one else to have one too
if they expect to get anything nice in life

to me maxing the wage min and
mining the reg hourjob day
and maxin
the above reg hour premium rate

that's a job class mission

the eitc
is pure liberal largesse
take it when availible
hell defraud it
for all i care mates
but don't ask for it

ask for free kid and elder daycare
and single payer health care
------------------------------
btw
borders with or without walls
will not matter nearly so much
if the dollar falls very seriously
against latin and asian currencies
not euros and pounds ...pesos and rupees

[evagrius]

js paine ;

I agree with you- providing free child and elder care, ( some countries have child care but no elder care yet),
would be something grand.

What's the deal with not doing so?

Don't take care of a child now- deal with him or her in prison later?

[Buce]

"The number of eligible persons who fail to claim the EITC is estimated at 25 percent of those currently receiving the credit."

I assume Brian Caplan will explain this as a lifestyle choice. This will outrage countless readers (well, 50 or so), including me.

But if it is not, what is it?

[Peter Schaeffer]

Js Paine,

What is a gradgrind?

Buce,

Evagrius has answered your question, in my opinion.

[Tom Geraghty]

Why EITC versus the minimum wage? Barry Bluestone and Theresa Ghilarducci argue that the two complement each other as part of an overall wage insurance system:

Bluestone and Ghilarducci note that essential components of a wage insurance system already exist in the earned income tax credit (EITC) and the minimum wage. But the EITC and the federal wage floor must be seen as complements to one another, not substitutes for one another, in order to meet important criteria for any insurance program: high target efficiency and minimal adverse behavioral effects. Properly used, the EITC and the minimum wage fit together like finely cut jigsaw puzzle pieces; the considerable strengths of the EITC offset weaknesses in the minimum wage, while the minimum wage’s greatest benefits offset some of the shortcomings of the EITC.

. . . Neither the minimum wage nor the EITC is by itself an ideal solution to the wage poverty problem. Yet when the two are combined, the sum is greater than its parts. On three criteria (income adequacy, target efficiency, and labor supply employment effects), the minimum wage is weak. These are precisely the strengths of the EITC. On four other criteria (labor demand, productivity enhancement, fiscal impact, and limited moral hazard), the minimum wage is clearly the preferred program. What
makes the two fit together so well is that the existence of a higher minimum wage actually reduces the negative productivity, fiscal impact, and moral hazard effects of the EITC, while the EITC makes up for the weak target efficiency and income adequacy of the minimum wage.

[john c. halasz]

Peter Schaeffer:

Thomas Gradgrind was the skinflint utilitarian in Dickens' "Hard Times".

[MikeB]

Bruce,
A lot of evidence on the link between minimum wages and employment is reviewed in Neumark & Wascher "Minimum Wages and Unemployment" and they find the balance of evidence shows there is a connection.
http://www.ner.org/papers/w12663
there are studies, like Card's work on NJ which don't find a link, but many studies do and i think we are wise to beleive that the law of demand does operate in the real world without strong evidence to the contrary.
If you don't think there is a link between skills and unemployment, you can go to bls.gov and review employment by education level.
I strongly agree with you that important skills are learned on the job, and that is a main reason i think we should do all we can to get people without a lot of "school" skills into employment, where they can get those "practical" skills.

[Peter Schaeffer]

Tom Geraghty,

The paper Making Work Pay is quite interesting and I recommend reading it. It is somewhat out-of-date having been written in 1996. Note that the authors are celebrating the (then) recent increase in the minimum wage to $5.15 an hour. It is still $5.15 an hour.

If the minimum wage was raised to 9.29 an hour (the 1968 level), the wages of a minimum wage worker would rise by $8,280 a year. Less after FICA, but still a considerable amount. Is anyone proposing EITC payments of this magnitude?

However, to really bring the minimum wage back to the 1968 level we need to take into account the growth in productivity since then. This is more complex than it sounds because of the divergence between the CPI and the GDP deflator. You get quite different estimates of productivity growth depending on which measure you use.

However, even using the most conservative measure, a $12 an hour minimum wage looks reasonable. This works out to be $13,700 raise for a full-time minimum wage worker. Less after FICA and other taxes, but still a considerable amount. Compared to the EITC?

Table 2 in the paper shows something interesting. In 1968, the minimum wage provided 118% of the Poverty Income for a family of three. By 1995 it was only 72%. In 2006, it must be considerably less than 72%.

The authors do discuss the minimum wage versus the EITC in several places. They mention target efficiency from time-to-time. However, they don’t appear to be particularly concerned that teenagers and other non-poor individuals might benefit. Their biggest critique of the minimum wage is inadequacy. The following quote is typical

“As noted earlier, the federal wage floor would have to be $7.80 per hour for a full-time worker to earn enough to raise a family of four above the poverty line ($15,600 for 2,000 hours). Hence, most workers in poor families fall into a “dead man’s zone.” The Clinton minimum wage is below what they are currently making, but their pay is not sufficient, even on a full-time, fullyear basis, to catapult their families out of poverty”

Clearly a higher ($9.29 - $12.00) minimum wage address the adequacy issue.

Another set of quotes from the paper makes the bigger point.

“Average wages have been falling, family incomes have stagnated, and distribution of both earnings and household incomes has become vastly more unequal over the past two decades. Between the end of World War II and 1973 inflation-adjusted average weekly wages for nonsupervisory employees rose by 60 percent, and real median family income, boosted by the growth in female labor force participation, doubled. Those at the bottom of the income distribution saw their incomes rise slightly more than those at the top. The Employment Act was well on its way to fulfilling its promise of adequate income for those at work.”

“Such a benign climate of rising income, more equally shared, came to an end in 1973. Since then, average weekly wages for production and nonsupervisory employees have fallen by nearly 20 percent.”

[Peter Schaeffer]

MikeB,

A country with at least 8 million illegal workers, mostly unskilled, isn't suffering from any shortage of jobs.

[John Thacker]

the politics associated with the EITC make it much less likely it would be enacted as compared to the minimum wage.

Why do you say this? The EITC was expanded in 1986, 1990, 1993, and 2001, each time a major tax reform was undertaken. In addition, the recent CBO study about the EITC v. the minimum wage was done because Sen. Grassley's request. I don't think that there's a lot of evidence for your claim that it's less likely that an EITC hike would be enacted; especially considering the likelihood of Republicans such as Sen. Grassley to offer the EITC as a compromise instead of raising the minimum wage.

[Norm Cloutier]

Bruce,

"I don't believe that low level wages are being set by the marginal productivity. I believe another recognized (in reality world) economic principle is in play: "What the market will bear". Employers pay their employees as little as they can get away with and charge their customers as much as they can get away with..."

Exactly right Bruce, and that is perfectly consistent with standard neoclassical labor market theory. Low skilled workers are very likely paid the value of their marginal product, but the key word here is marginal. Are all workers paid what their “worth”? Of course not, in fact, only the marginal worker is. If you are part of the large unskilled (read interchangeable) workforce, the price of your labor services is set in a similar fashion to the price of any commodity, however crass that might sound. If you are a talented one-of-a-kind worker (David Ortiz, Boston Red Sox) then your wage is likely much closer to your marginal contribution. Most of us are somewhere in between.

[prefab homes]

Back in 2005, eager real estate investors made down payment after down payment on new condominium projects throughout the state of Florida. Like many house flippers, these investors relied on the prospect of being able to quickly flip their new condominiums as soon as they were completed. Sadly, nearly three years later, far too many flipper dreams have been crushed. Buyers are no where to be found, and in many cases, condominium projects that broke ground nearly three years ago aren’ t even completed.