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Use tax credit, not minimum wage, to help poor

President Barack Obama wants to raise the federal minimum wage to $9 an hour from $7.25 as a way to alleviate the pain of poverty and make work more attractive for the poor.

These are worthy goals, but they should be paid for by taxpayers nationwide, not just by the businesses that employ lower-wage workers. Instead of redistribution through regulation, Congress should enhance and improve the earned income tax credit, or start a new taxpayer-financed program that makes working more attractive for the poor.

The great appeal of raising the minimum wage is that it appears to reduce inequality without increasing budget deficits. That seductive glimmer is the policy’s greatest flaw. We should have a debate about how much to spend to promote opportunity. We shouldn’t embrace policies that make politicians look caring without requiring them to pay the cost of justifying higher taxes. We should abhor cheap tricks, such as unfunded mandates, and the minimum wage is a bit like an unfunded mandate.

Like the minimum wage, the Americans with Disabilities Act was motivated by worthy goals. I care deeply that disabled Americans suffer less. But instead of funding remedies with taxpayer dollars, the ADA pushed the burden downstream to local public transit systems, declaring that it was discrimination for a system to “fail to provide” alternatives such as “paratransit and other special transportation services to individuals with disabilities.”

Transit costs

This means that the finances of the Boston area’s transit system, for example, have been deeply strained by the $40-a-trip cost of paratransit, which leads to more than $100 million of annual spending that is only trivially offset by $5 million in federal aid. The costs of righting a widespread social wrong shouldn’t have to be paid for by bus and train riders, who face higher fees and reduced service, as systems work to cover the law’s mandated costs.

Likewise, why should the costs of making the United States more egalitarian be paid by the employers that happen to hire lower- wage workers? In January, the unemployment rate among high school dropouts was 12 percent. Only 40 percent of that group was employed at all.

Those scary numbers reflect a failure of entrepreneurial imagination: an inability of American companies to figure out ways to productively employ the less skilled. The most skill-intensive sectors, including my own, won’t pay the price of a higher minimum wage, precisely because they provide so few jobs for people at the low end of the skill spectrum.

The debate over the minimum wage is often depicted as a battle of social justice, calling for higher wages instead of economic efficiency, which operates best with fewer regulatory restrictions. Although providing more for the poor may be social justice, there is nothing just about loading all the costs onto the employers and customers of lower-wage workers. For 20 years, there has been a fierce debate about the impact that minimum wage laws have on unemployment.

Alan Krueger, now chairman of the Council of Economic Advisers, and David Card, of the University of California at Berkeley, are responsible for the research that reopened the debate on the efficiency costs of the minimum wage. They compared fast-food workers in New Jersey and Pennsylvania and found little decline in employment after New Jersey raised its minimum wage in 1992. Their 1997 book brings together five years of their serious scholarship, which suggests that at low levels an increase in minimum wage does little to discourage employment.

Economists David Neumark and William Wascher provide the strongest alternative voice. Summarizing a large body of recent research, they write that “the oft-stated assertion that recent research fails to support the traditional view that the minimum wage reduces the employment of low-wage workers is clearly incorrect.”

Reducing employment

Changes in the minimum wage have been found to reduce employment by Kevin Murphy of the University of Chicago and economists Donald Deere and Finis Welch of Welch Consulting as well as by Janet Currie and Bruce Fallick. These findings are sufficiently disparate so that progressives can plausibly claim that Obama’s proposed minimum-wage increase will do little harm to employment, while libertarians can argue that a 24 percent increase in the minimum wage will lead to more unemployed teenagers and high school dropouts.

We would be stuck between two ideologically driven viewpoints if the minimum wage was our only tool to help lower-income Americans.

There are better ways of making work pay. The earned income tax credit has helped make work pay since 1975. It rises initially with income up to a maximum of $5,236 for families with two children, and then it phases out.

It has downsides, such as administrative complexity and monitoring, but it has been shown to increase employment, especially for single mothers. It can be improved and increased, and it remains the best alternative to raising the minimum wage.

Perhaps the simplest way to alter the credit is for it to provide a clear per-hour benefit directly to workers earning less than $9 an hour. An extra $1.75 an hour, the proposed increase in the minimum wage, for the 1.67 million workers who currently earn the minimum wage, would cost about $4 billion, which could be easily funded with minor cuts to other programs such as highway spending.

The federal government enacted another smart policy when it gave workers a payroll tax holiday during the recession that also helped make work pay more for lower-income Americans. That tax holiday ended last month.

Bashing employers

The New Year’s Eve budget deal would have done more to encourage employment if it had kept the tax holiday, rather than the unemployment insurance extension.

Political progressives see raising the minimum wage as a tool to promote equality without raising taxes. Some of them even seem to like the idea of punishing big business. But such anti-enterprise authors are wrong to bash those employers who are helping to solve the American underemployment problem. The economy’s larger challenge isn’t the companies paying $7.25 an hour, but the companies that only employ workers at the top end of the skill distribution and pay much more.

Redistribution through regulation has a long history in Europe, where abundant labor market regulations materially reduce work hours. Raising the minimum wage wouldn’t turn the United States into Greece, but it is a step in the wrong direction — away from smart egalitarianism toward a policy that is popular only because it seems cheap.

It would be odd for the United States to ramp up its labor market rules at a time when unemployment remains high and even President Francois Hollande of France is pushing for less labor market rigidity.

The free market doesn’t provide opportunity equally and Obama is right to want work to pay more. But smart egalitarianism aids the poor, encourages work and is paid for by everyone who has a stake in a fairer nation with less unemployment.

The Republicans have a chance to show their support for the working poor if they counter the president’s minimum wage proposal not with an angry “No way,” but with a smarter alternative, such as increasing the earned income tax credit and making its benefits simpler and more salient. For once, they could make the Democrats seem like the dinosaurs trapped in their New Deal past, while the Republicans are offering anti-poverty policies designed for the 21st century.

Glaeser, an economics professor at Harvard University, is a Bloomberg View columnist. He is the author of “Triumph of the City.”

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