An EITC Increase Versus a Minimum Wage Increase
Warren Buffett has a piece in the Wall Street Journal supporting an increase in the earned income tax credit (EITC) as an alternative to an increase in the minimum wage. I’ve seen several bloggers link to it approvingly, but none that discuss the differences between the two approaches, so I will try to fill that gap.
Minimum wage laws are regulations, but they can also be equally well conceptualized as a tax on employers of minimum wage workers paid directly to the employees they employ. To help see this, visualize employers cutting a check to the IRS for the difference between what they pay the worker (say $1/hour) and whatever the minimum wage level is wherever they work (say $10/hour). The IRS then immediately hands the check over to the employee. The employee thus receives his regular paycheck of $1/hour plus a check from the IRS for $9/hour for a total of $10/hour. Minimum wage regulations thus function from an economic perspective exactly the same as a tax levied on the employer and a cash benefit given to the employee.
I should add at least one caveat, however. The IRS doesn’t actually have to do anything if you enact a minimum wage increase rather than a tax and immediate hand-over. There are no extra administrative burdens on the IRS, and only one check is cut.
In contrast, the government pays the EITC. In general, the more you work, the more you get up to a point, so the EITC avoids setting up a situation where someone might get more money by working less. (You can decide for yourself whether you think that is a good thing.)
Photo credit: Pete Souza
As Buffett notes, to actually receive the EITC, you have to file a tax return. Not everyone who qualifies knows to do this. If I had to guess, it’s probably the people in the communities who need it most that are least likely to know the EITC is available to them since that’s how things work with almost every other government benefit. The EITC does add administrative load that increasing the minimum wage doesn’t.
Another difference is that the EITC is that it is a lump-sum payment rather than a supplement to each paycheck. This probably has consequences on how people will spend the money. If you make payments more frequent, people would be more likely to spend them on day-to-day living expenses. A yearly lump-sum payment, in contrast might be used to pay down debt, or some other one-off expense. Despite its name, the EITC might feel more like money from the sky rather than money the worker “earned”. People tend to report this feeling about tax refunds in general even if they know intellectually that it’s actually their money just like what they receive in their paychecks.
The EITC incentivizes fraud. I now know multiple people who have had tax refunds filed in their names by people who are trying to receive EITC. If you know someone’s name and social security number, you are most of the way toward being able to file a false return in their name. One could argue this is an issue with the current IRS tax return, not with the EITC, but the EITC is what makes it attractive, and increasing the EITC would make it more attractive.
On the plus side, since the government pays the EITC, companies are unlikely to hire fewer workers as they would in response to a minimum wage increase. This is the benefit of the EITC that Buffett cites as most important to him.
Priceonomics wrote recently about wage theft. If you increase the minimum wage, you increase the incentive for employers to commit more wage theft. If you check the link, you’ll see that many of the professions listed as most subject to wage theft are jobs that probably pay close to minimum wage. I do not think this is an accident. Increasing the minimum wage will have the perverse effect of burdening the companies that are most studious in paying their workers for time worked the most while having less of an effect on companies that commit wage theft. Again, you can argue that this should be dealt with through enforcement of existing labor laws, but that is less likely to happen.
As noted above, minimum wage increases are paid by companies that pay workers such wages. (I’m ignoring the important issue of tax incidence in this post.) The EITC, in contrast, is paid by “the government”, which practically speaking means wherever we are likely to capture taxes from in the future. I expect readers will be divided on whether this difference is a bug or feature of the EITC. If you think there is a general need to help poor people and that need should be shared by everyone, you should consider the EITC. If you have a strong dislike for the sorts of companies that pay their workers minimum wage, then you are more likely to think forcing the burden to be shouldered by those companies is a feature of minimum wage laws rather than a bug.
But none of the above is the most important practical difference between the EITC and a minimum wage increase. Even though the minimum wage can be properly conceptualized as a tax on companies collected directly by workers rather than by the IRS, it doesn’t actually show up on any federal budgets. No real-life people actually think of it as a tax increase. Minimum wage laws are the perfect way to have the exact same effect of increasing taxes without having to increase taxes. “My opponent voted for a regulation that is the economic equivalent of raising taxes” is not that gaming an accusation. That is the minimum wage’s best feature politically.
The EITC won’t reduce demand for workers the way minimum wage increases will, but the EITC affects federal budgets. The CBO will score a minimum wage increase as saving money while the CBO will score the EITC as horrendously expensive. This is a stupid reason to prefer one to the other, but that’s the way things work.
A minimum wage increase puts more money in the hands of consumers; particularly at the lower end of the spectrum. They will spend that money, often within their own communities. The multiplier effect of a minimum wage matters a great deal.
I’ll repeat myself, but I’d prefer to see some sort of tax-code support for small and rural businesses, not continued subsidies for some of the world’s largest and most profitable corporations; they are rent seeking in their employees and the general tax base.Report
The EITC
puts money in the hands of the same people the EITC doesin the hands of people who have relatively low total incomes. You may be right that the EITC is less likely to be spent buying day-to-day stuff since it’s paid out only once per year, as I concede in the post.Edited: The beneficiaries of the EITC and a minimum wage increase do not perfectly overlap. I’d have to look up the EITC qualification rules again, but I think high-school students who are able to get jobs would benefit from a minimum wage increase, but probably wouldn’t qualify for the EITC if they have rich parents.Report
The EITC (which would still exist,) puts money in the hands of some families; but many of the low-wage earners who qualify don’t file.
Minimum wage increases put money in the hands of a lot more people, for smaller or single-member households, lifts them above EITC eligibility, and will, in general, do more to lift the economy than EITC does.
I really recommend reading through that link I gave, lot of good information (on a state-by-state level, too) about who’s affected by a minimum wage increase.Report
This is also a point conceded in the post.Report
Now I feel a bit bad for having used the word “concede”. The OP wasn’t intended to advocate one approach over the other. If such a position leaked through, that wasn’t my intention. Despite blogging about this stuff occasionally, I’m not a policy guy. I chose to go to the business school rather than an economics department for a reason, and it’s primarily because I’m interested in companies should do given whatever constraints are set up by public policy.Report
@zic
What in your opinion would/should that type of support look like?Report
I’m on my way out the door now, and I’ll think about this while I’m out digging in my mother’s flower beds.
Short answer would be payroll-tax supports for qualifying business (small business, larger businesses in rural areas where there isn’t the population base to support them but the business is needed). I’d also look at other business taxes, perhaps shifting some of the burden for unemployment insurance and workmen’s comp away from smaller businesses; though this is state, not federal, and so enormously complicated.
But if we can do an EITC for families, we can do similar size/income tax relief by business, too. I really hate to see large corporations like WalMart hide behind the skirts of the local hair salon and mom-and-pop grocery store.Report
I see. Thanks for answering my question.Report
@zic
Even assuming minimum wages increase spending, the multiplier effect doesn’t work that way.
Multipliers rely on an assumption that there is spare productive capacity in the economy – that there is a significant quantity of available resources that could be profitably deployed in the economy, but are not being so employed. The term for this set of conditions is “recession”, outside of a recession there is no spare capacity to deploy – the extra spending just ends up bidding for already-employed resources which leads to higher prices with no impact on GDP. Instead of stimulus you get inflation.
This might lead you to ask whether minimum wage increases would be a good idea in a recession – use them as a form of stimulus. However, Keynesian economics suggests that recessions are the worst possible time to increase minimum wages. The New Keynesian model for what causes recessions is “nominal rigidities”, which is a fancy way of saying that prices can’t drop quickly in the face of an economy-wide fall in demand. If prices and wages could fall freely, recessions wouldn’t really happen at all. But since prices can’t adjust quantities adjust instead, leading to a fall in spending and employment.
So I’m sure that you can imagine what a Keynesian economist would say about responding to a recession by making wages even more rigid.Report
Multipliers rely on an assumption that there is spare productive capacity in the economy – that there is a significant quantity of available resources that could be profitably deployed in the economy, but are not being so employed. The term for this set of conditions is “recession”, outside of a recession there is no spare capacity to deploy – the extra spending just ends up bidding for already-employed resources which leads to higher prices with no impact on GDP. Instead of stimulus you get inflation.
There are, I think, other ways to define multiplier effect beyond the Keynes use of an injection of capitol by the government. As I used it it would mean an injection of capital into working households at the low end of income that increases both their spending (an upward multiplier) and savings (a downward multiplier)
Since minimum wage has not kept pace with inflation, wages have been declining, and that decline has been a downward multiplier that has lasted for decades; and while that has resulted in some downward pressure on goods — some things are amazingly cheap now! — it has also diminished the ability of families on the margins to consume those goods, particularly those that aren’t cheap.
The results in stuff like cash that sit in corporate accounts, not flowing through the economy (particularly not being lent to small businesses) and an oversized participation in social safety net programs.
The slack is in the flow of money, and increasing the minimum wage may be the best way to take up that slack.Report
Zic is correct, of course. Multiplier effects in this sense have nothing to do with recessions, and measure interrelatedness. They’re commonly used by economists in the way that zic described, particularly in measuring the impact of increases in employment and wages.Report
@zic @chris
You misunderstand my objection. I am not objecting to the idea that the minimum wage can be described as having a multiplier. I am objecting to your understanding of how The Multiplier Effect works.
The Multiplier Effect is a Keynesian concept – it relies on the core Keynesian idea that additional spending increases production. This idea has a lot of purchase in popular views of macroeconomics, and would appear to have some merit, but we know for a fact it is wrong at least in Keynes’s original formulation. Keynes argued that spending was the fundamental driver of growth – the more people spent, the wealthier everyone got.
This was the economic consensus up until the 1970s, but hit a serious empirical problem. An implication of “Spending => Growth” and “Lack of Spending => Recession” is that it should be impossible for there to be inflationary pressure and falling economic activity at the same time. Which is to say old-school Keynesian economics predicts stagflation will never happen. Which is why the economics community has moved away from old-school Keynesianism.
Unless I’m reading you wrong zic, you are arguing that higher minimum wages would lead to persistently higher growth rates. This idea – that spending can have long-run multiplier effects, is exactly the sort of old-school Keynesianism that is now discredited. Modern versions of the Keynesianism instead suggest that the ability of spending to increase economic growth depends on there being spare capacity in the economy – resources that are available to use to make things but aren’t being used because no one is buying.
This is something that only happens in recessions. Under normal economic conditions you don’t get a multiplier effect, all you get is more inflation. Even then, the effect of the spending is temporary, eventually GDP will fall again, and you will end up with inflation. This is a reasonable trade-off in a recession, but outside of recessionary conditions doesn’t make much sense.Report
Unless I’m reading you wrong zic, you are arguing that higher minimum wages would lead to persistently higher growth rates.
I am not arguing this; at least not persistently. I am arguing that for the short term, higher wages would lead to higher growth; simply because the minimum wage has declined enough to hinder growth. It’s like priming a pump to help water flow.
But I have some issues with the notion of increasing productivity as the measure of economic growth, too; the flow of money seems as important, and I don’t think increases in productivity happen without, first, an increase in flow.Report
You can get increases in productivity simply through technology. Someone invents a transistor,say… (now,you do need enough capital to make something about the transistor, sure…)Report
@zic
Thanks for clarifying.
Priming the pump is a good analogy because priming the pump doesn’t work if the pump is already pumping. This is what I mean when I say that raising the minimum wage would only increase economic growth in recessionary conditions. If you raise the minimum wage when the economy is already ticking along nicely, the end result will be to increase inflation instead.
And, as I noted in my original comment, raising the minimum wage in a recession will actually make the recession worse for other reasons.Report
Yes. There is behavior that in some situations will prime the pump that in other situations will flood the engine.Report
If you raise the minimum wage when the economy is already ticking along nicely, the end result will be to increase inflation instead.
No. I mean, it’s not like we don’t have tons and tons of data on this. You’re making the very simple mistake that I talked about elsewhere in this thread: You’re only considering one outlet for the increase in wages, and therefore assuming a particular effect. This is what happens when underspecified theoretical thinking encounters empirical reality: it misses a lot.
More specifically, because the wage increase is absorbed in other ways (turnover, training, other wages, increased demand, etc.), the effect of modest minimum wage increases on inflation is pretty damn small.Report
If you raise the minimum wage when the economy is already ticking along nicely, the end result will be to increase inflation instead.
Or nothing at all, because the better the economy is doing, the fewer people are making the minimum.Report
@mike-schilling
Or, as you say, nothing at all.Report
@james-k I don’t want to rehash the discussion “you don’t understand economics, and I do” libertarian argument, but you’re doing it again, and as with last time, it’s you who doesn’t know the economics. In this case, as is often the case when this argument is used generally, it is actually your knowledge of economics that’s getting in the way. You’re thinking of Keynsian multipliers, and are therefore missing that the concept of a multiplier is much more abstract, and you are therefore completely misunderstanding this particular use.
The multiplier effect, as zic is using it and as professional economists use it every day, because they understand what they’re doing better than you understand what they’re doing, is very simple. It says that new or increased wages create greater demand than existed prior, which results in an increase in production, which in turn creates new jobs and/or increased wages. Using a multiplier, you can estimate, for example, how many jobs the hiring or laying off of a large number of employees at one employer creates or does away with in the area in general. Adding 3,000 employees may create another 1,000 jobs throughout the local economy, say, because the people employed need more health care, eat out more, buy more groceries, etc.
This is not controversial. You are wrong. I recommend reading zic’s link, or if you prefer, the literature, which is large, on multiplier effects. You are smart and should, with a little reflection, quickly recognize your error.Report
I must confess I am skeptical that James K, a professional economist and policy analyst, doesn’t actually know what he is talking about…Report
He doesn’t. His problem is that, as a professional economist and policy analyst, he knows about Keynsian multipliers, but as a professional economist who clearly doesn’t work on anything related to employment, he doesn’t know about multiplier effects in employment, which are used by every single government agency involved in employment everywhere (except possibly North Korea).
I’m not kidding, this is very, very basic stuff, and the fact that he’s failed to even grasp what we’re talking about, much less what it means, suggests to me that he’s outside of his area of expertise, and that he’s simply not able to recognize that because “I took economic courses, you don’t know what you’re talking about,” which (as I’ve noted before) is a common mindset among a certain set of internet commenters (not just James, and not just here).Report
Ascribing arrogance as the reason is hardly a charitable reading.Report
Here is what James is thinking of:
http://www.investopedia.com/ask/answers/09/keynesian-multiplier.asp
See also:
http://en.wikipedia.org/wiki/Multiplier_%28economics%29#Keynesian_and_Hansen-Samuelson_multipliers
Here is what zic (and I) is talking about, from her own link, which James has failed to read:
http://www.economicsonline.co.uk/Managing_the_economy/The_multiplier_effect.html
Now, it’s probably worth noting that these are similar concepts, in that they are both multipliers, but one thing they clearly don’t teach in New Zealand economics programs is that “multiplier” is actually a general term for interrelatedness of two seemingly independent variables (or sets of variables). It basically says that if you change one thing by x, you’ll see a change of y in another thing, where y is the multiplier effect. This is not Keynsian at all, it’s just a basic modeling tool, and James’ knowledge of the Keynsian use of this tool has blinded him to other uses.Report
I understand the general use of the multiplier effect well enough to grok this argument. And I understand the basis in arguments about the marginal propensity to consume (that is, I understand the theory well enough, but am not familiar with the proofs behind it or very well-versed in the empirical evidence). What I do know is that the basic MPC model assumes way too much to be all that useful in giving us meaningful policy guidance.
There simply is no such thing as a robust marginal propensity to consume that correlates to income levels or one-time income shocks. People’s propensity to consume reacts to changes in income, but it also reacts to other things: estimates about future income and future income trajectory, the household balance sheet, individual personality.
As a positive way of making projections and forecasts about the economy, thinking about MPC is all well and good, but it’s a whole other thing to start advocating that transferring wealth from those we think have low MPC to those we think have high MPC is good from either an economic efficiency or social welfare point of view.
Take the case of me and my mother for example. My mother never made much money in income, my income level passed hers some years ago, but my mother has always saved more than me. Presently, I make many more times in income than she does, but my propensity to consume is much higher than hers. I do not think that anyone would argue that it would be for the good of the economy to effect some policy that would transfer wealth from my retired and living on a pension mother, who is likely to continue saving, to me, her son, whose household income puts him well into the 90th earnings percentile, because I am likely to spend more.Report
As a positive way of making projections and forecasts about the economy, thinking about MPC is all well and good, but it’s a whole other thing to start advocating that transferring wealth from those we think have low MPC to those we think have high MPC is good from either an economic efficiency or social welfare point of view.
Yeah, this is a worthwhile thing to weigh in any policy calculus concerning minimum wage, as should all of the other things we’ve mentioned, including multipliers. I imagine that many of us will come to different conclusions, ’cause our weights on the various pros and cons will be different. But at least we’re now talking about empirically-observed pros and cons.Report
@chris
I’ll admit to not having a particularly strong background in macro, but I do understand the concepts discussed here, and I don’t see any evidence that James doesn’t understand what you’re describing.
The assumption that transferring money from people with low marginal propensity to consume to people with high MPC promotes economic growth is contingent on there being cyclical unemployment due to a slack in aggregate demand.
If there’s no slack in aggregate demand, transferring money from people with low MPC to people with high MPC will divert real resources from investment to consumption, slowing long-run growth.
Which is to say, at full employment the multiplier is zero. The increase in demand for consumption goods is cancelled out by a decrease in demand for investment goods.
Everything I said above applies both to the fiscal policy multiplier and the multiplier from stuff like minimum wage increases. Really, minimum wage is a kind of fiscal policy: It’s like taxing employers and/or consumers and giving the money to low-wage workers.
Okay, but we’re not at full employment, so the multiplier is positive, right? This is where James’ objection comes in. Under Keynesian theory, recessions are caused by nominal rigidity, i.e. the tendency of nominal prices not to adjust immediately to changes in market conditions. Without nominal rigidity, there would be no recessions, because prices would adjust as necessary to allow markets to clear, resulting in full employment.
One of the more important nominal rigidities, when it comes to labor unemployment, is the fact that nominal wages are sticky in the downward direction. I think that’s a direct quote from Keynes. Raising the minimum wage not only fails to address this issue, but aggravates it.
Which is to say, the minimum wage may have a positive multiplier*, but because it aggravates nominal rigidity it’s a particularly bad way to do so.
*I dug into the details of the EPI paper and found that they assume 20-50% of the cost increase is passed on to customers, with the rest coming out of corporate profits. I’m not familiar with the literature on this topic, but the one paper I did find found 100% cost pass-through in the restaurant industry (which is not entirely implausible, given how competitive it is). With 100% of costs passed on to consumers, the multiplier drops to 0.16. I’m also not sure what percentage of low-wage workers work for small employers, or how that affects things. The assumption that corporate profits bear the brunt of the cost increase and that they have a very low multiplier did all the heavy lifting.Report
Looking through the literature, the empirical data on the multiplier effect with minimum wage increases specifically is limited (though you won’t have trouble finding studies that show consistent effects for small-to-medium sized states). However, you’re still over thinking this.
Whether an increase in income will produce a multiplier effect on employment and income more generally in an economic area (up to, let’s say, the state level in the U.S.) will depend on a lot of things — sector (tradable or non-tradable, e.g.), industry, makeup of local workforce (commuters, locals, migrants), the local investment environment (how comfortable people feel putting money into the region) — but full (or not) employment is not one of them (at least not directly, though see investment environment, which actually means that the effect of full employment would be in the opposite direction you and James are implying — that is, it would likely increase the multiplier, indirectly).
The effect is, again, really, really simple (simple enough that the tool is, admittedly, easy to misuse or overuse), and again, doesn’t directly rely on current employment levels. Let’s use a straightforward example:
Say the Acme Steel Company in Hillsburgh finds that their business is doing really well, so they need to expand. By either bringing in people from out of the region or taking people from within the region (employed or unemployed, but presumably making less, or in less secure employment, than they will be at Acme), they add 400 new employees at their Hillsburgh plant. Those 400 people are now going to spend money in the local/regional economy, which will produce an increase in demand large enough in certain industries to produce the need for more employees. That is, they’re going to eat out, they’re going to go to the doctor, and the dentist, and the local discount store, and so on, and spend money. That will cause some of the places they spend money to add employees, and may even result in new restaurants or doctors offices or dental offices to be opened (maybe not for just 400 people, but you see the point). That’s the employment multiplier, easy as pie. And there is a similar income multiplier.
This can happen even if the region is at full employment before Acme expands, of course. Hell, they can then be at full employment after and still have to bring people in from outside to fill the new service sector or medical or whatever jobs that are created as a result of the increase in local spending. And then still be at full employment. In other words, the level of employment doesn’t matter: the employment multiplier is a function entirely of increased demand for labor, and the income multiplier similarly.
As to this:
If there’s no slack in aggregate demand, transferring money from people with low MPC to people with high MPC will divert real resources from investment to consumption, slowing long-run growth.
That’s an empirical question, of course, and one certainly not adequately represented by your simple model (low to high MPC) of what a minimum wage raise entails. It’s important to note that both income and employment multipliers are meant to describe short and mid-term changes, not long-term ones, so anyone who talks about a multiplier effects with respect to a raise in minimum wage as a reason to adopt them would be prioritizing short-term effects (which is not to say that they’re ignoring long-term effects; it’s possible that the long-term effects are consistent with the multiplier effects; again, empirical question).Report
Some descriptions by actual economists (I’ll note that one describes it as broadly Keynsian, and I’m afraid that this will only confuse James further, but it’s a good article, so I’ll link it anyone):
https://www.uaex.edu/publications/PDF/FSCED6.pdf
http://aces.nmsu.edu/pubs/_z/Z108.pdf
http://pages.uoregon.edu/rgp/PPPM613/CommEconAnalysis.htm
http://www.rri.wvu.edu/WebBook/Schaffer/chap02.html
https://faculty.washington.edu/krumme/systems/multiplier.html
Recent real world application:
http://www.nhtoa.org/PSU%20%20NHTOA%20logging%20economics%20in%20NH.pdf
http://mar.sagepub.com/content/9/1/61.short
http://www.jobsnowcoalition.org/reports/pre-2010/case-min-wage-hike_2004.pdf (minimum wage specifically)
http://www.academia.edu/1905364/2012_-_P._Silva_C._Oliveira_Henriques_and_D._Coelho_Employment_effects_and_renewable_energy_policies_applying_I_O_methodology_to_Portugal_Proceedings_of_the_14th_INFER_Annual_Conference_Coimbra_Portugal_10-12_of_May (green jobs)Report
@chris
Your story makes sense as it is, but when you try to amend it to a minimum wage story things get screwy with the causality. In the Acme example, the 400 new jobs are the result of an increase in demand for Acme’s products. That is to say, when the economy grows, jobs are created. Trying to move in the opposite direction is a bit like pushing on a string.Report
Oh yeah, I should have stated more emphatically that the application of wage/employment multipliers to minimum wage raises is, as far as I can tell (and I’ve only searched today) undecided, empirically.
One of the links I gave gives some numbers, but it’s a policy paper, and I haven’t followed its trail yet.Report
Sure, which is why I go back to my original position: the minimum wage is likely close enough to the existing reserve wage that marginal changes aren’t likely to show us much of anything in terms of effects. Any minimum wage increase large enough to see the good things that we want from it are also likely to show us the bad things that we don’t want.
If what we care about is increasing the real wealth of people at the bottom of the income distribution, why not just directly transfer cash money to those people?Report
Sure, I’m all for transferring money to them.Report
@brandon-berg
Yes, that’s exactly what I mean, thank you.Report
@chris
OK, I read the links, and its clear to me we have some language confusion here. First off, I get that there are multipliers that aren’t Keynesian; for example, Input-Output models are full of non-Keynesian multipliers.
But zic is talking about an increase in consumer spending increasing economic output. That third link is assuming increasing consumption increases economic activity, which is an idea that originated with Keynes. So while zic’s multiplier may not be a “Keynesian Multiplier” it is a multiplier that operates with a Keynesian mechanism – hence my original objection.
The core source of confusion here seem to be that you were focusing on the label for the phenomenon, while I was focused on the underlying mechanism.Report
No, the confusion is that you’re focusing on the wrong thing, which is why you (and Brandon) think it has anything to do with recessions to unemployment rates. It doesn’t.
It’s possible zic is being vague when she talks about growth, but as her own link shows, the multiplier effect in employment (and income) is rather specific, and doesn’t say anything about overall economic growth, just a growth in the number of jobs or incomes as a result of increases in jobs/income. It’s possible to call this growth, of course, so she wasn’t incorrect in using that term, but it’s vague enough to create confusion, particularly where confusion has already taken root. And she only used that phrasing when you did, which is likely a result of her trying to explain using your own terms.
Anyway, again, it’s not an issue of different focus. You’re just on about the wrong thing.Report
@chris
At this point I have no idea what you are on about. You can’t talk about income or employment without considering GDP. I would also point out that zic and I are having much less trouble discussing this than you and I are, which makes me strongly suspect that continuing this conversation is a waste of both our times.Report
Thanks for writing this post, I really enjoyed it. I do think that EITC’s have one advantage that a lot of tax burdens do not. It’s billed as a “credit” and not a “tax.” That’s probably just semantics, but it can have the effect of bringing people on board who wouldn’t be on board.Report
@gabriel-conroy according to Gallup, 3/4 of Americans already support a minimum wage increase. So who are those people that need to be brought on board?
The answer to that question might be really important.
http://www.gallup.com/poll/165794/americans-raising-minimum-wage.aspxReport
Not that I was clear in my comment, but I actually wasn’t referring to people not being on board with minimum wage increases. Rather, I was referring to people being more on board with EITC than with other out-and-out tax increases. In the 1990s, for example, a lot the Gingrich Republicans were on board with making the EITC more generous.
I agree with you that a strong majority of people probably support a minimum wage increase.Report
“3/4 of Americans already support a minimum wage increase.”
Do they actually support a minimum wage increase? Or do they just support the idea that poor people ought to get more money? The Gallup poll did not offer any other options than raising the minimum wage.Report
Not really.
Having a background in taxes, I can tell you that credits come in two varieties: refundable and non-refundable.
The former are disbursements.
Unless, of course, your point is that some slight alteration of terminology might prove more persuasive to the truly ignorant, point conce3ded.Report
Given that this will result in fewer hours being worked by the same employees, this will give them more free time to allow more of them to get a second job to make ends meet.
That’s job creation no matter how you slice it.Report
That’s not a given; it’s an assumption, and one that presumes businesses are overstaffed now, which is rather silly.Report
The effects of minimum wage increases on hours worked is one of the few effects of minimum wage increases that we don’t have a lot of data on. However, all of the things we do have data on suggest that our intuitions, however theoretically informed, are poor guides in this subject. This is in part because we fail to consider the multiple possible responses to a raise, and therefore consider only the effects on employment levels, hours, and prices, as though they occurred in a vacuum.
Having had this conversation here before, however, I don’t look forward to it again.Report
Yeah, I remember those conversations pretty well. Not particularly fondly but they weren’t completely useless either.Report
This is one of those things that you’d think would be measurable, though.
We’ve had a number of increases through history. Did the numbers we care about most change significantly following the minimum wage increases?
(Alternately, what happened to the numbers after the institution of the EITC?)
If we have to conclude that we don’t know what happened the last few times we’ve done these things because of all of the inter-related factors (something I’m totally cool with), then I’m confused as to how it could possibly be a moral imperative to do them.
Well, on a Deontological level, I suppose I could. But Consequentally, I mean.Report
“I’m confused as to how it could possibly be a moral imperative to do them.”
Or as I have asked, to not do them.Report
I haven’t asked that we do things one way or the other just yet, LWA.
I do think that the folks saying “we need to change things!” have the burden of proof on them rather than on the people who say “I don’t know that we need to change things”.
The burden of proof, in this case, seems to me like it’s liftable. All it would take is a handful of numbers that, you’d think, would be measurable and just point out that the good numbers went up the last few times we’ve done this and the bad numbers went down the last few times we’ve done this and there are other good/bad numbers that went unchanged but, net, things got better.
I’m not asking for proof of the existence of God here.
Now it also seems to me that if we can’t get numbers (or the numbers are conflicting) and that we therefore cannot provide evidence that things got better (or, indeed, that things got worse), I’m wondering why we’re arguing as if the stakes are so high.
Unless, of course, this is a Deontological argument.Report
Since the minimum wage is in nominal, not inflation adjusted dollars, is it really true that raising it is what upsets the status quo? After all, refusing to do so for long periods of time (like we did prior to 2009), has the effect of steadily reducing the its real value.Report
A good question. Given that half of the people on the minimum wage are under 25 (and half of those are under 20), I suspect that raising the minimum wage won’t impact those people too much. (I’m presuming that a good chunk of the 20-25 year olds are likely to end up with more than the minimum wage eventually as well.)
So raising the minimum wage probably won’t upset too much for the teenagers or young adults who are going to be going on to wages greater than minimum. The status quo means something different for them.
But changing the status quo for the, oh, let’s say “two-thirds” of people who are on the minimum wage and look to be staying on the minimum wage is something that might be worth pursuing. According to the study that Chris provided, the only real downsides are to wage compression of the people making more than minimum wage or to the profits of the business.
That’s probably a decent tradeoff for other people to make.Report
@jaybird , that’s not what I’m saying. Because it’s in nominal terms, not raising the minimum wage amounts to cutting it by one or two percent every year. if we’re worried about changing the minimum wage status quo, we should index it to inflation.Report
We’d probably want to start including food prices and energy in inflation numbers, then.Report
And housing.Report
@jaybird Why? Seriously, I have no idea what the one has to do with the other.Report
Don,
I think Jaybird’s saying that pegging the minimum wage to inflation requires determining the method by which inflation is measured. A What’s in the basket? sorta thing.Report
Core Inflation doesn’t include food or energy. I understand that these are volatile but I’m pretty sure that we have the tools to do some seasonal adjustment.
(I mean, we have measurements like “the average cost of a home in February was a seasonally adjusted $214,000.” You’d think that we could do that for bananas.)Report
CPI.Report
Huh, I thought the CPI deliberately didn’t include that.
Looking at the bls numbers, the difference between the measure that includes food/energy and the one that doesn’t is more than a full percentage point.
I suppose that that’s volatile enough to say that relying on the one rather than the other is more likely to provide heat than light… but when people talk about the one that doesn’t include food or energy to make a point about inflation, it always feels like being on the wrong side of a shell game.Report
It … is, but that merely delays getting the effect of fuel or food increases into the CPI. If the cost of fuel rises, so does the cost of shipping goods. And we put the inflation of goods in the CPI.Report
It is measurable, and there is preliminary data. Just not conclusive data.
Minimum wage increases have been studied extensively for decades throughout the world. We have a good idea how they effect employment levels, wages already above minimum, prices, and retention, for example, but the hours worked thing ain’t there yet.Report
So let’s drop hours worked.
Are the other numbers good? We could be done with this argument before suppertime.Report
Lots.
http://dev.takeactionminnesota.org/wp-content/uploads/2013/10/Why-Does-the-Minimum-Wage-Have-No-Discernible-Effect-on-Employment.pdfReport
Well, from my understanding of that paper, it seems that there were a lot of “not conclusives”, “no statistically significant effects”, and so on.
The two things that did seem to have an effect were wage compression and profits, but that’s less important here.
So, sure, let’s raise the minimum wage. Why not?Report
OK, cool. Now we get to argue about how much to raise it, which is probably a thornier and more empirically complex question anyway.Report
Yup, “how much” is the question.Report
Yeah, that’s about my position. minimum wage tends to be set below the “nominal market wage” for low-income workers, thus you don’t hurt many businesses by raising it.
But really, i just want an inflation adjusted minimum wage, just like social security.Report
The truth of this statement depends almost entirely on what our intuitions are. My intuitions are that when you adjust one side of an equation, you are going to find some similar adjustment on the other side. So far from thinking about this in a vacuum, my intuition is to think about the effects in the context of the specific shock and over multiple iterations.
In terms of context, one thing to remember is that wages and other factors of employment tend to be sticky downwards. Employers don’t tend to pay people less in absolute terms when productivity or marginal revenue drops and employers tend not to resort to laying people off either. What tends to happens is that wages stagnate and employers resort to attrition; that is to say, many of the effects that theory tells us might happen immediately actually tend to happen over a longer period of time. They happen, though.
The other thing to consider is that raising the minimum wage tends to have a very small measurably effect on employment levels, because increases in the minimum wage tend to be very small. What we do know, however, is where those disemployment effects tend to fall: on the least skilled/least productive/least experienced workers. This is important.
In order for the ‘higher minimum wage leads to higher growth story’ to be true, then an increase in the minimum wage needs to be a transfer of wealth from the relatively wealthy employers to the less wealthy employees. The problem is that is only part of the story. The other part of the story is that an increase in minimum wage is an transfer from relatively less skilled/experienced/productive workers who lose their jobs, or some of their hours, to the workers who keep their jobs at the higher wage rate and a transfer from consumers to employees in the form of higher prices, which also has the effect of decreasing the level of the real wage increase (this one is really important).
All that said, I cannot bring myself to get to worked up about increases in the minimum wage. Just keep in mind that this isn’t magic beans; this is a conscious decision to make certain workers better off by making employers (which is intentional) and other workers (which is not so intentional) worse off.Report
Start here.Report
Blank links.Report
Oops, MC beat me to it.Report
Sorry. Link #1 was supposed to be to the United States Chamber of Commerce. Link #2 was supposed to be to the National Republican Congressional Committee.Report
“No real-life people actually think of it as a tax increase.”
O Really? I sure as hell do…because it IS on.Report
Economists and bloggers are not real-life people in my book. (No offense intended.)Report
Thank god since I’m neither 🙂Report
Yes, you just carry on conversations with people who aren’t real!Report
Economists and bloggers are not real-life people …
Man, James K and Tod K are gonna be really disappointed when they find out about this.Report
They won’t be disappointed because they don’t exist.Report
The EITC does not have to be taken as a lump sum. You can request that it be added to each pay check. The company then gets a credit on their payroll withholdings for doing so.Report
Will Truman and I have been discussing this on Twitter. https://twitter.com/trumwill/status/602856281045610496
There once was an Advance Earned Income Tax Credit that allowed you to get more in each paycheck, but it was eliminated in 2010. See http://t.co/18FVJwJeie
Unless you’re thinking of something else I’m not familiar with.Report
But if one knew approximately the amount one could if tax is withheld increase the exemptions on the W-4 to drive the withholding to nearly zero. However it would not increase net pay by more than the withholding. (Perhaps as indicated elsewhere the W-4 is beyond many folks to figure this out)Report
Also, what’s to prevent someone who doesn’t qualify from lying on their W-4 and then not filing a tax return?Report
I don’t like the after the fact/lump sum nature of the EITC. Stuff like EITC often feels like it is designed by wonks who would rather be clever over anything else. The minimum wage increases allows for more money up front, doesn’t require filing a tax return, doesn’t rely on nudgeocracy and paternalism.Report
The EITC is not a tax increase. Paying for it would require one. Or we could not pay for it and just add it onto the deficit, which has been the most common thing since 1981.Report
Not sure if this is directed at me, but, yes, it is not a tax increase. In fact, it can be thought of as a tax reduction for the lowest paid workers into a bracket whose tax rate is negative. (Again, just because you can think of it that way doesn’t mean people will.)Report
No, the groups that insist that tax cuts are always good things will call it welfare. Which brings to mind another difference between the two. I’ve never heard of the minimum wage being reduced, while last year the House voted to eliminate the EITC.Report
while last year the House voted to eliminate the EITC.
I wasn’t able to confirm this. Maybe you were thinking of this?Report
Yup, I got taken in. Thanks for the correction.Report
Note that the EITC as currently structured is heavily skewed towards “families,” and is yet another example of anti-non-breeder oppression:
http://www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-Credit/EITC-Income-Limits-Maximum-Credit-Amounts-Next-Year
Bad enough that, as a single male with zero children, I have to pay for all of your kiddie stuff – schools and child healthcare and WIC and all that gimme gimme gimme that you privileged familied oppressors steal from me – I’m also hit with the personal insult of denial of benefits at tax time. And don’t get me started on the double regressive payroll tax I as a self-employed single male with zero children also have to fork over.
It’s hard out here for a self-employed single gentleperson. Minimum wage means nothing to me either – just another way for breeders and joiners to entertain themselves at my eventual expense – unless, despite the unfair burdens you place on me, I happen to succeed well enough to think about hiring someone. Your reign of terror fills people like me with so much hostility that despite our love of law and order, we’ll consider making exceptions in this instance.Report
However, since at least MW doesn’t distinguish between families and single people, it’s relatively less cruelly oppressive, even if, as noted, it does nothing for the SE’d.Report
UBI, my good man. Get thee on the bus. Fighting against a “child benefit” therein will be a lost battle, but we can fight to limit it.Report
“UBI”?
Actually, if the objective is to get it passed, you’ll probably have to expand the child benefits in order to get support from the usual suspects on both left and right – and helps explain why the EITC has had the support it has had. Also, if the EITC is essentially, as VB explains, an equivalent to minimum wage, shouldn’t it always be factored in when arguments about stagnation in the minimum wage rates are made? Or, put differently, isn’t “real income support” something like MW + EITC?Report
I need to review some of this, but my recollection is that at one time I came to the conclusion that EITC and MW are policies that should operate in conjunction with each other while, in my view, under a UBI of the right amount that had appropriately scheduled increases, eliminating the MW would be advisable.
And yes, you’re right that the more child-bene focused a UBI were, the more plausible it would be politically. My hope would just that be in the process of starting over, we might be able to arrive at a less-stilted-against-the-childless equilibrium. If it’s framed as a benefit for everyone, hopefully the bulk could go to individuals regardless of child status. A you say, the EITC really materializes once you have kids only ($500 max for individuals without kids; $3400 for individuals (possibly couples?) with just one kid – also much higher eligibility cutoffs if you have kids: http://www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-Credit/EITC-Income-Limits-Maximum-Credit-Amounts-Next-Year).
In my advocacy, I would be pointing to the existing tax credits as the way to help the relatively affluent raise kids, being open to expanding those, while I would probably push a more means-tested program for adding to the UBI for parents with low incomes (including the UBI). Ultimately a UBI would certainly have a child credit within it, but my hope would be to limit that.
But your concern is right: recently, some major UBI advocates have switched to advocating for just a “child benefit” as an intermediate step between where we are and UBI. As if the arguments necessary for that wouldn’t pretty much destroy the arguments for eventually expanding it into true universality. (“People deserve it because they do the societal work of raising the kids! …No wait I didn’t mean to commit to that as the real justification: in reality everyone should get a UBI!”). Notably, the people I have in mind were UBI advocates as young unmariieds, and have now gotten married and found out that raising kids is expensive. (Yes, I am talking about the Breunigs, i.e. in one case an alum of this site.)
Sorry to ramble possibly incoherently; gotta run. Tl;dr: you are pretty much right in all you’ve said here, @ck-macleod.Report
Of course! 😉 Except I was a bit exaggerating my spite toward the breeder-joiner-oppressor to make a couple of points both in regard to this discussion narrowly and also to the widely acknowledged to the point of being consensual “enduring state interest in the family” that on other topics (no, not just THAT topic) people find it convenient to imagine outdated.Report
Understood, and my adoption(!) of your “benefits-hostages” language below was tongue-in-cheek.
Now I’m wondering how big a bit it might be that your spite (I’m guessing that’s itself a bit of an exaggerated word all on its own) was exaggerated.Report
Oh, now I get it, “Universal Basic Income.” Acronym hasn’t been widely popularized yet.
Used to be called “Guaranteed Annual Income.” Indicatively, was once debated as “Should an annual income be guaranteed to each family unit?” Another past term for it: “Negative Income Tax.” As I recall, the Nixon Administration was supposedly seriously considering it.Report
http://www.remappingdebate.org/article/guaranteed-income%E2%80%99s-moment-sunReport
UBI, GBI, GAI – the acronyms do abound. Should have spelled it out, sorry.Report
EITC is… a lump-sum payment rather than a supplement to each paycheck
I actually didn’t know this. Why is this?Report
I don’t know why, but if I had to guess it would have something to do with ease of administration, or perhaps it’s meant to encourage poor folks to file tax returns.Report
I figure it’s like rebates; makes you think you’re doing something, getting a great deal or helping the poor or whatever, but the paperwork involved discourages people actually taking advantage of. I looked for numbers on this, but didn’t find a lot. It’s apparently hard to calculate because many people claim it who are not actually eligible, according to one otherwise useless paper I read at Brookings about what we don’t know about the credit.
But I did find this
Four out of five would be 20% of families not claiming, and an additional need of approx. $13 billion dollars to fully fund the credit.Report
It’s paid out like a an income-tax refund if you’ve paid in too much; file your taxes by April 15, and get money back if you qualify for EITC or had too much withholding.Report
It seems like it could easily just be applied against withholding each paycheck. If it’s meant to be income support, a yearly lump sum seems a poor way to go to me.
Of course, wiping out withholding for the bottom X percent of wage earners would interfere pretty significantly with the USG’s steady flow of revenue throughout the year.
That’s why I’m not the biggest EITC fan. I like what EITC is trying to accomplish, but I don’t love its structure. It seems like it plays a lot of games with the tax apparatus in order to hide the ball on what it’s really trying to accomplish. If we want to have a wage subsidy system, I wish we could just have a real one.Report
That’s possible, but then we’d have some families claiming it, and having to pay taxes on money they’ve probably already spent, too. Because it’s a credit on your last-year’s income, you need the total amount of that income to calculate the size of the credit.Report
Seems like it would just go down as wages and be included for withholding throughout the year. So my bad on the “wipe out withholding” point. Couldn’t it just raise paychecks, then be taxed like other income, which is to say SS/MC withholding would stay in the system, and income taxes would be refunded at tax time as normal based on the new amount?
Seems like it comes down to whether we want to further expand the “forced saving” effect of the withholding/refund practice, or try to raise paychecks.Report
Putting EITC on each paycheck would even more expose it as a backdoor means-testing of social security on the payments-in side, with, as I’ve been saying, special penalties on single people. The child-benefits part may also partly explain why it’s assessed yearly, since people have a way of adding their benefits-hostages (aka, children) somewhat unpredictably during the year – though I guess the money-grabbing joiners could get a separate breeding ransom paid at tax time, too.Report
Good points. I think the accounting fiction that SS withholding really would continue to go into the trust fund matters, whereas EITC operates on the general fund/income tax side (I think?) does matter, though. But I’m interested in different opinions about this, in particular that of @will-truman, @zic, and @vikram-bath .
The benefits-hotages point is a good one, though. I think that’s the practical answer I was looking for, actually.Report
…Perhaps I should had called it an “accounting fact.” We could have that debate. I’d mostly listen.Report
@michael-drew
Some additional reasons I favor a higher minimum wage:
1) Respect: The social safety net stuff that we call welfare has a lot of stigma associated with it, those people are ‘moochers,’ and even the working poor get spoken of as being lazy, etc.; so it’s partly about the respect of work actually being respected instead of ignored in these national conversations;
2) Incremental increases: While there is some evidence of job loss at the margins (mostly marginal small businesses that are already at risk of shutting down,) there is not any overwhelming evidence of massive job loss; and there is evidence of stimulative effects of a minimum wage increase. Now this needs to be qualified with small, incremental increases, not a massive increase such as doubling the wage;
3) Real wages have declined: I think Jaybird made the point elsewhere that while minimum wage has not changed, inflation has happened, so in effect, people earning minimum wage are earning less than people earning minimum wage at the last increase;
4) Doubt about compression: There’s this concept of ‘compression,’ meaning that when you increase the minimum wage, people slightly higher up the wage scale don’t get pay increases; I’m not convinced about this, but it is something to consider;
5) The multiplier effect: There are a lot of studies out there that suggest that very small increases in local spending have huge benefits in the local economy; the dollar spent four or five times in a neighborhood or town has a much bigger impact on that local economy than the dollar spent at a place where it leaves the economy. One of the best ways to achieve this kind of multiplier effect is by increasing the wages of the lowest earners;
6) Corporate welfare: We don’t have different polices, for the most part, for large corporations vs. small. This provides a lot of cover for large and profitable corporations. WalMart can get away with paying crap wages because we worry about the small shop down the street. That means you and I, both taxpayers, are subsidizing WalMart, mostly owned by some of the richest people in the world, in the name of protecting that small, local business. This is sickening. And I should note that WalMart’s about face on some wages is because of wage competition from job recovery; not because of the goodness of the Walton’s hearts.
The single most important driver of the economy is consumer spending, and the best way to increase consumer spending is to pay workers more. The notion that this will hurt profits needs to be considered as one side of a coin, the other is that it will increase profits as we make more people able to participate in consumer spending on the margins. A different way to think about that is to consider funding for the presidential campaigns in the last election cycle; Obama was able to raise more in $5 donations from low-wage earners than Romney was from millionaires simply because of numbers. The only sector of the economy that didn’t have a downturn after the recession began was luxury spending, and we’ve seen that it simply wasn’t enough to lift the economy.Report
@zic
Not sure what this is in re: to. I’m for incremental MW hikes, and it was only under a far-out scenario that I entertain eliminating the MW. (I can get into why you’d want to do that with a UBI elsewhere.)
I have various thoughts about each of your points. Point #1 is certainly a very big part of the appeal of EITC over UBI. (Though to me it’s still swamped by the fact that… if you can’t find a job you remain screwed under EITC! The respect gained from work is important to preserve, but the degradation of abject poverty is amore pressing concern.)
The others get into economic speculation that I’m not better equipped than you are to qubble about. I agree with a lot of what you said and have splintered thoughts about others. A number of things you said, though, I think a @brandon-berg or a @james-k would have a field day with.
Broadly, though, I don’t know why you’re directing this at me. Under current circumstances, I’m all for MW hikes, though maybe not to $15. We’ll see how that goes. Certainly to $10, though.Report
You asked my opinion, so I not only agreed with the CK’s point (EITC as opposed to wages don’t earn you retirement benefits, seems a big part of that,) so I gave my whole opinion.
Personally, I don’t think a UBI stands a snowballs chance in hell, despite my concerns of the difficulties of creative people making a living in the gig economy.Report
Oh.
No, I was asking whether you think it matters that Social Security funds go into the “trust fund” – especially if we (went back to?) functionally letting EITC lower tax withholding on each check. My point was that, as a matter of accounting, if it lowered withholding, I think that would be against withholding for income taxes, not SS/Medicare taxes. (I think) the SS/Medicare contribution would stay the same, and still go into dedicated funds.
Of course, that’s all somewhat of an administrative fiction. So my question was, do you think that matters?Report
The SS trust fund is not a retirement fund, like a 401K; it’s only nominally connected to contributions; in that what you pay in determines your monthly withdrawal. (This may not be a good thing, either; imo, it pays the least to those with the greatest need and the most to those with the least need.)
If you live for 30 years after retiring, you collect that amount (and in COLA increases) for that 30 years, no mater how much you’ve paid it; if you live for only one year, same gig; it’s not ‘your’ money, it’s the public’s money, paid out for so long as the contributor lives. The person who only lives a year doesn’t get to pass on the remainder of their contributions to heirs, and the person who lives for 30 more years doesn’t stop receiving benefits after they’ve exceeded their contributions.
So the whole thing is a series of fictions created to help us be comfortable with a social safety net that helps keep old ladies from living off cans of cat food and freezing to death in the winter. The moral good here is taking care of the elderly; and I’m not particularly concerned about how we arrive at that point.Report
(Was there maybe a comment you wrote that didn’t go up yet, @zic?)Report
I’m not sure, @michael-drewReport
Because tax accountants suck, that’s why.
the government is perfectly capable of deducting our correct taxes from the paycheck (assuming you’re not an independent contractor or working for tips). Or just sending us a bill — the IRS already knows about how much we owe…Report
The CBO will score a minimum wage increase as saving money while the CBO will score the EITC as horrendously expensive. This is a stupid reason to prefer one to the other, but that’s the way things work.
Is this equivalent to saying or at least suggestive that having debates about “the size” of government or how much government spending is the right amount overall is likely to be stupid or misfocused analysis?Report
I wouldn’t necessarily say “likely”, but it can, and this is one instance in which it does. A EITC increase doesn’t really cost more than an equivalent minimum wage increase. If you’re concerned with deficits and the size of government (which I actually am most of the time), then you might be led astray by the fact that minimum wage feels like it is free while the EITC comes across costly.
There might *still* be other reasons to prefer a MW bump, but saving the government money relative to an EITC bump doesn’t seem to me to be a valid one.Report
Would raising the EITC impact people’s need for government assistance? Or is that not factored into the income requirements/eligibility determination?Report
my understanding, without having done the research to double check, is that eligibility is based upon pre-tax income. Since the EITC is technically part of the tax code, that means it wouldn’t count as income for purposes of means-tested programs.Report
The deleterious effect on unemployment is one of the key and I think over-riding features that counts against the minimum wage.
I think the EITC should and can be calculated and paid out on a monthly basis*. Employers would initially bear that burden (like in a minimum wage) but then be able to claim a payroll tax credit for the amount of EITC they pay out in a year.
*the way this would work is the following. If an annual income of $x would normally get a $y lump sum, a monthly income of $x/12 would get a $y/12 monthly supplement. Presumably, x should increase faster than y decreases or else you get perverse incentives.
There are two problems I see with this option.
1. It puts pressure on smaller businesses which may not have the capital to pay up the higher wage until they can claim it on tax day. But, if these companies are already exempted from paying minimum wages, then the problem should be minimal.
2. People whose employment is seasonal will qualify for a lower tax credit while they are working (as compared with someone who has the same annual income sans credit, but whose income is spaced out in a lower, but more frequent and regular salary. Compare someone who works 12 months a year at $1800 a month vs someone who works 6 months a year at $3600. Their annual income is the same, but with a tax credit that is calculated on a monthly basis, the second guy will qualify for a lower tax credit. One way out of this problem is for the monthly EITC calculation to vary with the type of employment. But that depends on the facts on the ground. Are people engaged in seasonal work likely to be engaged in other seasonal work in the other half of the year? Are people engaged in part time jobs likely to hold down two part time jobs? If an employee has two seasonal jobs or two part time jobs then they are effectively employed full time but under different employers. We wouldn’t want to give them more than other people who are also employed full time but under one employer (or would we?).Report
What percentage of minimum wage workers work for little local Mom and Pop’s?
If this is one of those things where the majority of the minimum wage workers work for fast food joints, Wal-Mart kinda joints, and other Massive Conglomerate kinda companies, that would be one thing.
If it’s a situation where we’re more likely to put an even bigger squeeze on Mom and Pop’s… one that fast food joints, Wal-Mart kinda joints, and Massive Conglomerate kinda companies won’t feel… then I can’t help but notice that I’d be calling for a change that would be easily absorbed by Wal-Mart but hurt/harm little local stores.Report
The SBA standards are 500 employees or fewer, $7m revenues or less.
My state’s standard is 50 employees or fewer, $2m revenue.
Obamacare standards are 100 employees and 50 employees, but I can’t remember the differences.
I’ve read that 50% of people in the US work for a small business; and I think that’s based on the SBA standard.
Census numbers on employment by firm size.Report
That’s very thorough of you, zic! A quick Google tells me that 66% of minimum wage workers work for companies with over 100 people. If that’s the case, then maybe minimum wage workers are spread among company of different sizes very, very roughly in accordance with how the labor force as a whole is spread among companies of different sizes.
Maybe.Report
One thing that I can’t shake is the personal experience of working for minimum wage and becoming a better worker thereby. Trained to use a register. Trained to stock shelves. Trained to straighten. Training re-enforced on the importance of showing up on time and showered. Trained to deal with customer service. Trained to wrap presents. Trained to take lunch orders. Trained to cut cakes. All of these little things that added up.
My bosses were taking a risk on hiring me (and, for some, it paid off more than it did for others) and I’m pretty sure that I was a better employee when I moved on than I was when I was hired.
To the extent that this is true for me, I’m wondering for how many others it is true for. To the extent that it’s true for others, I’m wondering how many people won’t get the benefits that I got from these kinds of experiences.
Now, maybe, raising the minimum wage won’t have much of an impact for people in situations like I was in. I’d hope not… but many of the entry level jobs that I got in new industries asked me about stuff like my entry level jobs from earlier in my experiences.Report
The value you describe is long-term in nature, and seems to consist of meta-skills like practical application of work ethic, manual dexterity, applied mathematics, attention to detail, and delivering friendly service. These are good things and I don’t dispute that “starter jobs” are good places to cultivate those meta-skills.
The Federal minimum wage back when you and I were teenagers was $3.35 an hour (raised to $4.25 in 1991 with a training wage of $3.35 an hour that would be applicable to the sort of work we’re talking about here). What I wonder is, if you had been paid, say, $5.50 an hour instead of $3.35 an hour to do the same work, would you have absorbed the lessons of attention to detail, good work ethic, and the like in the same way?
In other words, is there a causal relationship between minimal pay and the didactic value of a starter job?Report
In other words, is there a causal relationship between minimal pay and the didactic value of a starter job?
I don’t know if there’s a relationship between the pay and the value, but my curiosity is on the extent to which the price will have an impact upon the “lemon” problem.Report
Here is an interesting post from the Conversable Economist that shows the way the EITC currently works:
http://conversableeconomist.blogspot.com/2015/05/the-earned-income-tax-credit.html
In particular note the chart in the first part that shows the phase in and phase out areas.
Note that the EITC phases in at .34/$ and phases out at .21/$ Thus minimizing the incentive to not work more.Report
Nice piece. Thanks for sharing it. It also does a good job of expressing some of @ck-macleod’s complaints.Report
Ironing : The labor leaders in LA want an exemption to minimum wage laws for themselves.Report