Minimum Wage and EITC

Arindrajit DubeMike Konczal recently interviewed economist Arindrajit Dube about the minimum wage. In a blog post after the interview, Konczal explained something that Dube had talked about and it is really interesting. You see, there are people like Matt Yglesias who argue that the best way to help the poor is to give them money directly. Enacting things like the minimum wage just messes with the economy. So instead, we should raise their incomes directly through mechanisms like the Earned Income Tax Credit (EITC). Except that it isn’t that simple.

As Konczal notes, many economists complain that taxes do not necessarily fall on the people who are directly taxed. For example, they claim that corporate taxes just get passed onto consumers in the form of higher prices. (As I noted yesterday, this is nowhere near the whole story.) But when it works the other way, most economists are blind to it.

Here’s how it works. When the government gives poor people money through the EITC, it allows employers to pay them less. It is estimated that for every dollar given in EITC, employers siphon off 27 cents in lower wages. That’s a lot. That means that 27% of the EITC program goes to often very big companies. But wait…

Minimum wage to the rescue! By keeping the minimum wage at a reasonable level, it prevents companies from siphoning off money from the EITC, because they can’t reduce wages very much or at all. Thus, the minimum wage and EITC work in tandem to better help the working poor.

Unlike a lot of people who push the non-minimum wage line, Matt Yglesias is very open to new evidence. I’ll be very interested to see if he takes note of this.

Update (18 February 2013 3:35 pm)

Matt Yglesias has spoken. I think he’s being a little deceptive. As I recall, he came down on the EITC side of this discussion. But now, he is calling for Guaranteed Basic Income (GBI). This would be a government program that makes sure that everyone has some basic amount of money with which to live. He notes that this amount would effectively set a minimum wage because no one would work for less given that they get paid for doing nothing. I agree with him: a modern economy ought to be able to provide people with their essentials. And it is important to remember that this would help people take risks and try to build new products and services. As a man who has started a lot of companies, I can tell you that you think much more about the consequences of failure than you think of all the piles of money you will make if you are successful. Knowing you have a fallback is critical. But I still think that Yglesias is hedging.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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