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A Bit of Nuance on the Minimum Wage

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When it comes to DC policy debates, we tend to devolve pretty quickly into "you're either fer it, or you're agin it."

This thought came to me this week when a number of people asked me to comment on two pieces written by perceived critics-economists David Neumark and Harry Holzer-of the increase in the minimum wage, a policy of which I've been vocally supportive.

Readers viewed these pieces as being solidly in the "agin it" camp, and there's definitely some of that in them. But I thought they were both pretty nuanced, and found points to agree with in both pieces. Importantly, while these critics are definitely not in the "fer it" camp, their recent contributions make clear that they are not solidly in the "agin it" camp either, a point about which they're both fairly explicit.*

So perhaps we can use these pieces to derive a bit of insight as to why the academic fight over the minimum wage is so confusing. (I stress "academic" because the lobbyist fight against the minimum wage is about protecting profits from higher labor costs.)

The Neumark piece elaborates one basic, indisputable point: the minimum wage is not as well-targeted towards low-income working families as is the Earned Income Tax Credit, a wage subsidy for low-income workers. That's because while the tax credit is conditioned on family income, the wage is not (it's still the case, however, that 54% of the benefits of the proposed increase to $10.10 would reach households in the bottom third of the income scale).

But there are some key points left out of Neumark's argument. First, it is a non-sequitur to compare a minimum wage increase with the existence of the tax credit. Many of those calling for an increase in the minimum wage are doing so because their paychecks are stretched to the breaking point to meet their needs. The EITC solution to this problem is thus a higher tax credit. Neumark and others who make the case for the EITC over the minimum wage need to be explicit about this. It's not enough to tell low-income workers about the EITC. Most already know about it (the program has very high take up). You have to call for a higher EITC and I did not see that in Neumark's piece (though he would agree with it).

Second, you will have to look far and wide to find a bigger fan of the EITC than yours truly (though Ronald Reagan praised it as well), but nothing's perfect. There are two shortcomings to the tax credit that the minimum wage increase helps to offset.

The tax credit provides a generous wage subsidy for low-income workers with kids, but very little for childless adults (as the Neumark piece acknowledges). Their EITC maxes out at $487 this year, the equivalent of $0.23 extra cents per hour. And that's the max. The average childless adult recipient of the credit takes home about $270 over the course of the year.

Moreover, and this is really a very serious shortcoming of this part of the tax credit schedule, if you're a childless adult and you work full-year at the minimum wage, you earn too much to be eligible for even the much-reduced tax credit. So let's be clear about who the credit is helping and who it's helping a whole lot less. Again, those who propose the EITC as a substitute for the minimum wage need to advocate for an expansion to this corner of the tax credit as well.

Neumark mentioned the other EITC concern: the fact that by increasing labor supply -- a feature, not a bug -- the program lowers wage offers in segments of the low-wage job market. It is here that he recognizes that "there may be an argument for coupling the earned-income tax credit with a higher minimum wage." He adds, however, "But to be clear, the higher minimum wage entails some job loss."

That brings me to the Holzer piece. Harry's critiques are twofold. The first agrees with Neumark on job loss. And they're right. Much quality research, including work by those who advocate for higher minimum wages, finds that the policy leads to some loss jobs or cutbacks in hours among affected workers.

But the question is how much, and the answer, as Holzer himself agrees, is that job loss from moderate increases appear to be "small or nonexistent." Most low-wage workers, the vast majority by most estimates, including those of Neumark himself, earn more when the minimum goes up.

But what do I mean by "moderate?" This is Holzer's other concern: he worries that some of the recent proposals are "immoderate," i.e., high enough to trigger unintended consequences that could change the favorable benefit/cost equation of the increases we've implemented thus far.

He may have a point. Historically, increases in the minimum have affected less than 10% of the workforce and that has led me to define "moderate" as raises that have a sweep of this magnitude or less. But some recent proposals have come in above this historically safe benchmark, and Harry is correct to raise an eyebrow. I should also note here that not only does Holzer support moderate increases in the minimum wage, he actively supported an increase when he was the chief economist at the US Labor Department.

It also the case, as he argues, that in theory, national mandates should trigger fewer negative effects than local ones, since no firm can gain a competitive advantage by relocating across some border.

And yet, the best, most granular research I've seen on this question looks for precisely these sorts of cross-border effects and again, finds that the benefits of an increase to low-wage workers outweigh the costs.

Over decades of research, here's what I've concluded from what I believe is a balanced look at the issue. Though it reaches a lot of people and families who need it, the minimum wage is not nearly as well-targeted to those with low-incomes as the EITC. Still, it remains an important complement to that venerable policy, and helping low-wage workers requires both. It is wrong to aver that moderate minimum wage increases do not lead to any losses of jobs or hours by affected workers. But the benefits of the wage increase leave them better off, on net. Going beyond "moderate" may generate less favorable results. But neither theory nor available evidence can determine that outcome.

This may well be why most people and even a growing share of economists support increasing the minimum wage. Even the perspectives of these two alleged critics are not completely at odds with this position.*

*How do I know this? Because I asked them. Both Holzer and Neumark were kind enough to read and comment on this post.

This post originally appeared at Jared Bernstein's On The Economy blog.