A No-Cost Proposal to Reduce Poverty & Inequality

Proposals to increase the minimum wage at the federal, state and local levels are currently receiving a lot of attention. Workers from Seattle to Washington D.C. have been promised a raise.

Advocates for an increase point to the failure of the minimum wage to keep pace with inflation or with average wages in the economy as a whole. A single parent with two children earns less than $15,000 a year working full-time on a minimum wage job: hardly enough to support her family, especially after deducting payroll taxes and work-related expenses such as child care. Whatever her level of effort, she will end up poor and probably dependent on government benefits to survive.

While a higher minimum wage will help to boost earnings, critics worry about its effects on hiring, arguing that employers will create fewer jobs if they have to pay higher wages. Although past increases do not appear to have adversely affected employment, there is no denying the risk that much larger increases might pose to the least skilled workers. Raising the minimum from its current $7.25 to $15.00 per hour, as some have advocated, would more than double the cost to an employer and likely have some impact on hiring. In addition, a higher minimum isn’t well targeted on just the poor. Many of the people who would benefit from a higher minimum are secondary workers from more advantaged families. About two-thirds live above 200 percent of the federal poverty line. Only about a fifth are poor.

If we are really worried about families at the bottom, a better way to improve their lot is to increase the Earned Income Tax Credit (EITC) since it is well-targeted to those who most need assistance and will not significantly affect employers.

That said, any increase in the generosity of the EITC could cost billions of dollars—unlikely to be approved in today’s fiscally constrained environment. Moreover, as currently designed, although it clearly encourages work, it may discourage marriage, or encourage unwed childbearing. (Empirical evidence for the last two effects is lacking but they remain a concern.)  

Our proposal

A better way to boost earnings is to combine the best elements of each policy, allowing them to work in tandem to reduce poverty and inequality. Specifically, we recommend the following hybrid policy:

  • Raise the minimum wage to $10.10 and index it for inflation;
  • Provide a more generous EITC to families with young children (and somewhat less to large families);
  • Provide a significant benefit to childless individuals;
  • Eliminate the marriage penalty for most households by basing credits on personal instead of family income;
  • Impose a work requirement for childless workers (and a less stringent one for second earners) and restrict eligibility for these two groups to households below 200 percent of the federal poverty line.