Income inequality is a package deal

On February 17, 2014

Some minimum-wage workers are certainly teenagers or secondary earners in middle-class households.

However, the available data from the Economic Policy Institute suggests roughly half of the workers to be affected by the $9-an-hour raise proposed on the national level are families earning less than $40,000 a year.

The claim that a minimum wage raise isn’t particularly well targeted as poverty relief is clearly the result of a selective review of the available evidence on the subject.

The other popular concern - that less low income jobs will be available due to the higher cost of labor - is also put into question by the bulk of the practical analysis regarding labor cost and employment.

A study from the Center for Economic and Policy Research of fast food employment in states with different minimum wages found “no evidence that the rise in minimum wage reduced employment at fast-food restaurants.”

Some of the studies have suggested employment isn’t affected because higher wages decrease labor turnover, raising productivity and labor demand.

The classic argument from demand makes sense here too. As the purchasing power of low income workers increases, local businesses take in more revenue and thus have more capital with which to pay their workers.

As for the Earned Income Tax Credit program (EITC), you won’t hear many complaints from me.

I will briefly say passing EITC as opposed to wage legislation is missing the larger idea that the taxpayers shouldn’t have to subsidize poverty wages.

When full time workers are relying on food stamps and Medicaid to survive, we all bear the burden in the form of higher taxes.

Responsibility for the welfare of employees needs to be increasingly a matter of corporate ethical consideration.

Shelling out more tax dollars should be the second option on the table.

That being said, the answer to EITC as a reason to reject a raise in minimum wage is that the two are not mutually exclusive.

Income inequality is an increasingly serious problem in the United States, and a structural issue of that magnitude isn’t solved with either/or policymaking.

Heidi Shierholz from The Economic Policy Institute says the two policies are actually best suited as a package deal.

She points out EITC can have a perverse impact on the wages employers pay by effectively subsidizing wage decreases.

“Since it significantly raises the after-tax wages of many eligible low-wage workers, it may act to lower the before-tax wages paid by employers,” she said.

Max Sawicky, also from EPI, says an EITC recipient usually does not recoup benefits from a tax credit until he or she files an income tax return the following year.

The real time wage increase provided by Obama’s initiative raises the purchasing power of low income consumers in a more stable, consistent way.

So when passed together the EITC significantly raises the after tax income of many workers while the higher minimum wage establishes a floor for those workers not eligible for the program.

The only thing keeping us from doing both is political will in Congress.

When polls show that upwards of 80 percent of Americans want to see a higher minimum wage, it’s clearly time for legislative action.

 

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