Tuesday, September 2, 2014

A "Win Win" for American Workers

Wants to Make Work Pay

Ditto, But Has a Better Plan 

Speaking in Wisconsin on Labor Day, President Obama reiterated his call for a higher national minimum wage. The President claimed that such coercive wage fixing will help ensure that "hard work pays off --- with higher wages, and higher incomes."  The President did not mention a recent report by the Congressional Budget Office predicting, consistent with economic science, that the President's proposal to mandate a minimum wage of $10.10 per hour would throw 500,000 Americans, and perhaps more, out of work.  Nor did the President mention other scientific evidence rebutting his previous claims that raising the minimum wage will stimulate the economy and increase employment.

President Obama is right to be concerned about the economic plight of America's working poor. Fortunately a resident of Wisconsin has offered an alternative plan that would improve the living standards of millions of Americans without the various negative consequences of higher minimum wages.  In particular, Congressman Paul Ryan has proposed expanding the earned income tax credit ("EITC") for workers without children, thus significantly raising the effective wage that such individuals receive.

As currently structured, the EITC provides an annual tax credit of $5,500 to an individual with two children who works full time at minimum wage.  When combined with the current federal minimum wage of $7.25 per hour and the refundable child tax credit of $1,000 per child, the EITC pushes the effective wage for such individuals to just under $11.00 per hour.  (See this tax calculator to generate these data.)  Individual workers without children fare far worse under the current tax code, however.  Such individuals are of course not eligible for the child tax credit.  Moreover, the EITC provides such individuals only $503 per year, less than one tenth what individuals with two children receive.

Congressman Ryan's proposal would double the $503 credit for such employees, lower the eligibility age from 25 to 21 and raise the income cap that limits participation in the program. The Ryan proposal would be superior to increases in the minimum wage in several ways. First, the proposal would not throw any Americans out of work.  Second, raising the EITC would confer its benefits only on individuals who need assistance.  By contrast, raising the minimum wage would confer benefits on all minimum wage employees, including, say, teenagers and college students in high income households.  Indeed, most individuals who work for minimum wage are not in or near poverty, with the result that higher minimum wages redistribute income from businesses and consumers (some poor) to individuals in the middle and upper classes.  Third, the burden of an increased EITC would fall on the community as a whole, and not merely upon those employers (and their consumers) that happen to occupy low wage industries.  Fourth, the cost of increasing the EITC would be transparent, unlike the cost of the minimum wage and other labor regulations.   Fifth, the EITC would preserve a level playing field between employers competing with one another in the marketplace. By contrast, mandating a higher minimum wage would disproportionately burden small, labor-intensive firms vis a vis those with capital-intensive production processes, thus protecting large incumbent firms and distorting firms' choices of production technology.  (See pp. 293-95 of this article for additional detail regarding how minimum wages and other labor regulation can disadvantage firms with labor-intensive production processes.)   It is thus no surprise that leading economists, such as Christina Romer, have endorsed the EITC as superior to the minimum wage as a means of ensuring that hard work pays off.  Nor is it surprising that various newspapers, including the Washington Post and Baltimore Sun, have endorsed Congressman Ryan's plan.  (See here and here).  Indeed, President Obama has himself advocated such an increase in the EITC, albeit in addition to a job-killing minimum wage.

It should be noted that, even if Congressman Ryan's plan becomes law, the effective wage of a childless American earning the minimum wage will still be less than $10.00 per hour.  Perhaps there is room for a compromise of sorts between the President and Congressman Ryan.  That is, President Obama could back off his demand that Congress increase the minimum wage, and Congressman Ryan could propose a more generous increase in the EITC. Such a plan would be a "win win" for millions of American workers.