Obama’s State of the Union Proposals Signal a Way Out For the Poor

Ben Harris
Ben Harris Vice President and Director - Economic Studies, Director - Retirement Security Project

February 4, 2014

The list of the President’s favored policies mentioned during his State of the Union Address included an expanded Earned Income Tax Credit (EITC), a higher federal minimum wage, and extended emergency unemployment benefits. While these policies would affect American workers differently, they all support the notion that poverty should not be a condition endured by Americans who choose to work.

In today’s economy, millions of Americans are unable to escape poverty through employment. Of the 26.5 million working-age Americans in poverty in 2012, over 40 percent-10.7 million individuals-worked, including almost 3 million people who worked full-time. (Millions more were limited by either disability or an inability to find a job.) And these statistics don’t count those struggling families just above the poverty line. In 2012, of the 11.4 million working-age families with incomes between 100 percent and 250 percent of the poverty line; a full 27 percent were dual-earners. For these families, having both spouses work is simply not enough to escape a near-poverty livelihood.

The President’s proposed policies would help to ensure that all Americans can work their way out of poverty. Foremost, the EITC-a wage subsidy of up to 45 percent for each dollar earned-has been an exceptionally effective vehicle for improving the well-being of workers. In 2012, the credit helped over 27 million workers earn higher after-tax wages, especially those workers in some of the country’s poorest regions. However, the EITC is worth little to childless workers, prompting the President and others to call for its expansion. Extending the EITC to workers without children would not only help bring childless workers above the poverty line, but could also promote marriage and labor force participation while lowering crime and incarceration rates.

Raising the minimum wage is a contentious issue. Economists tend to agree that raising the minimum wage would affect the wages of not just those workers earning exactly the minimum, but also millions of other low-wage workers earning just above the minimum. In fact, nearly 30 percent of the non-elderly, non-self-employed workforce-35 million workers in total-earn within 150 percent of the minimum wage and would see their wages rise along with a higher minimum threshold. The key question, of course, is whether these higher wages would be offset by large losses in the demand for low-wage work. Some economists think a higher minimum wage would ultimately reduce incomes through lower hours worked, while others think this effect is negligible. However some of the most compelling evidence-economic studies of the impact of the minimum wage in counties adjacent to state borders-finds “no discernable impact on employment.”

The President also proposed a continued extension of unemployment benefits to help those out-of-work Americans actively seeking employment. The extended benefits expired at the end of last year; putting them in place for 2014 would extend aid to nearly 5 million workers suffering under high long-term unemployment rates. Indeed, long-term unemployment remains persistent after the recession, with 38 percent of the unemployed having been out of work for at least six months. Unlike the expanded EITC for childless workers and higher minimum wage, which would be permanent, extending unemployment insurance is a temporary fix for a labor market that still offers only one job for every three job seekers. And while opponents cite the potential for extended benefits to discourage employment, careful academic research has shown that these benefits produce almost no disincentive effect whatsoever.

The President’s proposals suggest that there may be optimism for America’s working poor. Although the minimum wage remains divisive, legislators on both sides of the aisle have shown support in the past for an expanded EITC and extended unemployment. And while Republicans continue to exhibit distaste for federal benefits not linked to work-House Republicans last fall passed $40 billion in cuts to food stamps, including stricter work requirements -members of both parties appear to agree that work should be a pathway out of poverty. These three policies might just be the key steps along that path.