Google+
Close

The Corner

The one and only.

Romer: Increase the EITC, Not the Minimum Wage



Text  



Christina Romer, former head of President Obama’s Council of Economic Advisers, has an op-ed in the New York Times today laying out her thoughts on the minimum wage, and her former boss’s proposal to increase it to $9 — she’s not a big fan. The key bits:

Raising the minimum wage, as President Obama proposed in his State of the Union address, tends to be more popular with the general public than with economists. . . .

Most arguments for instituting or raising a minimum wage are based on fairness and redistribution. Even if workers are getting a competitive wage, many of us are deeply disturbed that some hard-working families still have very little. Though a desire to help the poor is largely a moral issue, economics can help us think about how successful a higher minimum wage would be at reducing poverty.

An important issue is who benefits. When the minimum wage rises, is income redistributed primarily to poor families, or do many families higher up the income ladder benefit as well?

It is true, as conservative commentators often point out, that some minimum-wage workers are middle-class teenagers or secondary earners in fairly well-off households. Butthe available data suggest that roughly half the workers likely to be affected by the $9-an-hour level proposed by the president are in families earning less than $40,000 a year. So while raising the minimum wage from the current $7.25 an hour may not be particularly well targeted as an anti-poverty proposal, it’s not badly targeted, either.

A related issue is whether some low-income workers will lose their jobs when businesses have to pay a higher minimum wage. There’s been a tremendous amount of research on this topic, and the bulk of the empirical analysis finds that the overall adverse employment effects are small.

Her assessment of the preponderance of empirical evidence on overall employment isn’t unfair, but I would point readers to Arpit Gupta’s superb post on the Agenda a few weeks ago to discover exactly what the key literature has found. Arpit also points out that there are probably a variety of other effects of a higher minimum wage that aren’t picked up in short-term analysis of overall employment.

Romer points out a few potential downsides to a minimum-wage hike — consider that increased low-skill labor costs will raise prices at the kind of establishments, such as Walmart and fast-food restaurants, that are so important to the poor families the president’s proposal is supposed to help. #more#So, she explains:

It’s precisely because the redistributive effects of a minimum wage are complicated that most economists prefer other ways to help low-income families. For example, the current tax system already subsidizes work by the poor via an earned-income tax credit. . . . This approach is very well targeted — the subsidy goes only to poor families — and could easily be made more generous.

By raising the reward for working, this tax credit also tends to increase the supply of labor. And that puts downward pressure on wages. As a result, some of the benefits go to businesses, as would be the case with any wage subsidy. Though this mutes some of the direct redistributive value of the program — particularly if there’s no constraining minimum wage — it also tends to increase employment.

One of the obvious differences between a minimum-wage increase and an EITC boost, then, is the distributional effects. Liberals can advance an argument for a minimum-wage benefit that you can’t get from a bigger EITC:

The macroeconomic argument that is sometimes made for raising the minimum wage [is that] poorer people typically spend a larger fraction of their income than more affluent people. So if an increase in the minimum wage successfully redistributed some income to the poor, it could increase overall consumer spending — which could stimulate employment and output growth.

But as Romer points out, even when doing some generous calculations, the amount of stimulus you could get from such redistribution would be pretty minor. This goes to an issue of some importance: Liberals support policies that reduce inequality, and like to suggest that this is solid economic policy, too, especially when facing inequality levels on the scale of the United States’. But as Romer points out here, and even Paul Krugman has explained, while there could be economic downsides to inequality, it’s pretty clearly not what’s holding the economy back right now, and a measure to reduce it wouldn’t be much much use in spurring growth.

Obviously, though, liberals also believe lower inequality as an intrinsically good thing, and a higher minimum wage appears to be a more direct way to do that than the EITC. But here it is worth noting that the largest increases in income inequality the U.S. has seen over the previous few decades have not been between the poor and the rest of the economy, but between the most wealthy and the middle class. Further, the explosion of cash and in-kind benefits for the poor has tended to mitigate growing inequality in those echelons, despite what appear to be stagnant wages (indeed, as Greg Mankiw pointed out when commenting on this piece, EITC spending has exploded in recent decades).

So Romer concludes:

If a higher minimum wage were the only anti-poverty initiative available, I would support it. It helps some low-income workers, and the costs in terms of employment and inefficiency are likely small. But we could do so much better if we were willing to spend some money. A more generous earned-income tax credit would provide more support for the working poor and would be pro-business at the same time. 

This obliquely raises an important point: Conservatives rightly praise the EITC, especially right now as an alternative to a higher minimum wage, but increasing it will cost the federal government money. For someone holding Romer’s views of our levels of debt and deficits, that is not much of a problem (she also suggest more spending on early-childhood education). But for the bulk of conservatives right now, it is, and that should be considered when suggesting the EITC as a counter to the president’s plan — it would be a non-negligible expansion of federal spending, though one that would in large part go to help the poor, blunting, perhaps, some criticisms of GOP budgeting priorities.



Text  


Sign up for free NRO e-mails today:

Subscribe to National Review