Federal Minimum Wage, Tax-Transfer Earnings Supplements, and Poverty

Source: Gene Falk, Thomas Gabe, David H. Bradley, Congressional Research Service, CRS Report, R43409, February 28, 2014

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 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. ….