Thinking Through the Relationship Between the EITC and the Minimum Wage

by Reihan Salam

Some argue that the EITC and the minimum wage are best understood as complements. Evan Soltas offers a good discussion of some of the technical issues at work.

Though I agree with Evan’s observations, I have a bit more to say. Consider the case of a less-skilled worker with limited English proficiency and limited non-cognitive skills. Employing this worker will, in the short term at least, be a more expensive proposition than employing a worker who is more accustomed to the ways of the working world, yet the benefits of socializing this workers into the norms of work are considerable. The problem is that these benefits won’t be captured primarily by the employer who takes a chance on this worker — rather, these benefits will be captured by the worker herself, by the public sector (in the form of tax revenue and foregone expenses), and by future employers who take advantage of the skills she acquires during her first months or years on the job. So in theory, the EITC can help close the gap between the social benefit of employing such a worker and the benefit to a particular employer. 

At the same time, however, shrewd employers will inevitably seek to exploit this wedge, e.g., by paying some workers less than they’d receive in a labor market untouched by wage subsidies, which is to say they will free-ride on taxpayers. Advocates of the minimum wage argue that they are seeking to limit this abuse by requiring employers to do their fair share of meeting the costs of providing less-skilled workers with a decent livelihood. There are a couple of mental models at work here, one of which is that workers are entitled to a living wage by virtue of the demands of dignity in the context of a particular society, but that employers must bear X share of this cost, regardless of the market-clearing price of the labor of a particular worker. Another is that the value of an hour of labor of literally any worker in the U.S. — including less-skilled workers with limited English proficiency and limited non-cognitive skills, presumably a product of social isolation and other unearned disadvantages (bad brute luck) — is worth substantially more than $7.25 to literally any employer, and even if not this labor market relationship is so offensive to basic decency that it ought to be banned, even if it means that the workers and employers in question will have to turn to the black market (and be punished for doing so). I’m sure there are others. 

I actually don’t think that the idea of the EITC and the minimum wage as complements as a crazy idea, but much depends on the level at which both are set and the relative contributions of both to seeing to it that work is a more attractive option than non-work.

As always, there is a deeper debate beneath the surface-level debate in which people like me believe that there is something valuable about labor force participation and others believe that this is a poisonous mythology, in which punitive right-wing intellectuals (like me) fetishize the Puritan work ethic while failing to recognize the full humanity of those who choose various non-market pursuits, subsidized by the state. Edmund Phelps captured my basic view very well in an old Boston Review essay:

[W]hat about Parijs’s image of the workplace with its exhausted women and tyrannical bosses? I feel that many academics and others reared in relatively privileged circumstances cannot see how those working in a factory for forty hours a week could value it as a means to mix and interact with others, to gain a sense of belonging in the community, and to have a sense of contributing something to the country’s collective project, which is business. If I am right on these matters, we should feel sorry, not envious, about Van Parijs’s surfer who feels lucky to be able to drop out of the world of work thanks to his UBI; he doesn’t know what he is missing. And we shouldn’t feel sorry about women “subjected to the dictates of a boss for forty hours a week.” They have the self-knowledge to know something that Van Parijs appears not to know about them: the sociability, the challenges, and the sense of contribution and belonging that those jobs provide are an important part of their lives, as they are of the lives of others.

The problem is that the low-end pay rates are much too low, so low that some low-end workers must take the least “liberating” jobs to make ends meet. The solution is not to endow workers with a UBI, so that they move to somewhat better jobs at a reduction in pay or else just drop out. That way lies dependency, unfulfillment, depression, and marginalization. The solution is to institute a low-wage employment subsidy, so that all pay rates facing low-wage workers would be pulled up to levels better reflecting the social productivity of their employment, their support of themselves, and their development. Then low-wage men and women could afford to avoid dangerous, unhealthy, or oppressive jobs and opt instead for more rewarding work. And many more people would be able to know the satisfactions of self-support, development, participation, and contribution. [Emphasis added]

Phelps and (by extension) I are offering a theory of the subjective experience of work which could be incorrect, and indeed which is widely disputed by politically engaged professional sociologists and anthropologists studying labor relations in market democracies.