Politics & Policies, Report

Minimum Wage and Poverty in US – The income boost would be less than $1.00 for each $1.00 increase in gross earnings writes Congressional Research Service

Pending before Congress is legislation (S. 1737 and H.R. 1010) that would raise the federal minimum wage from its current $7.25 per hour to, ultimately, $10.10 per hour. The minimum wage would be adjusted for inflation thereafter. Whether the minimum wage or alternative policies, namely government-funded earnings supplements such as the Earned Income Tax Credit (EITC), are more effective in addressing poverty has been long debated.

The minimum wage affects workers regardless of their family status. A full-time, year-round worker at the current minimum wage would gross $15,080 in the year. A worker’s poverty status, however, depends on family circumstance, specifically family size. A single full-year, full-time worker earning the current federal minimum wage would have gross earnings above the 2014 poverty guidelines, but the same worker in a family of two or more people would have gross earnings that fall below these guidelines.

The federal tax system and government benefit programs take into account family circumstances in determining tax liabilities and benefits. Therefore, minimum wage and earnings supplement policies have differing impacts, depending on a worker’s family type. The main distinction is the presence of children in the family. Low-wage workers heading families with children receive considerable benefits from federal income tax credits and Supplemental Nutrition Assistance Program (SNAP) food assistance. Childless singles do not benefit from refundable tax credits as do households with children. The effect of federal tax and SNAP benefits is to partially mitigate differences in net incomes relative to poverty among the family types.

An increase in the minimum wage would boost gross earnings and increase the net incomes of families with a worker employed full-time, all year earning the minimum wage. However, because the federal tax system is progressive and need-tested benefits pay more to families with less income, the income boost would be less than $1.00 for each $1.00 increase in gross earnings, as workers pay more taxes and lose some benefits. The degree to which workers would gain net income because of a minimum wage increase also differs by family type.

The impact of an increase in the minimum wage on the well-being of minimum wage workers depends in great part on whether the wage increase would cause a loss in employment. Some economic studies have found that increases in minimum wages cause job loss; other economic studies have found no such job loss. A previous consensus that increasing the minimum wage reduces employment, at least among teenagers, has been challenged by numerous recent studies suggesting little or no dis-employment effects of minimum wage increases. However, the debate over the employment effects of the minimum wage is likely to continue.

There are also some considerations to expanding government-funded earnings supplements, such as the EITC, child tax credit, and SNAP. Expanding these earnings supplements would result in costs to the federal budget. In addition, these programs too might affect the labor market, albeit in ways different from a minimum wage increase. Research has provided evidence that the EITC has increased the number of workers in the labor market. Through the operation of supply and demand, this could suppress wage rates. Since all workers do not qualify for earnings supplements through the EITC, the child tax credit, or SNAP, lower-wage workers who do not receive them might be harmed economically. There has been some recent attention to considering minimum wage policies and earnings supplements as complementary, rather than alternative, policies.

Capture d’écran 2014-03-13 à 09.27.28

Chosen excerpts by Job Market Monitor. Read the whole story at Federal Minimum Wage, Tax-Transfer Earnings Supplements, and Poverty

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Discussion

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