Think Raising the Minimum Wage Will Help Fight Poverty?

Then prepare to be disappointed:

The decline in the real value of the minimum wage is indisputable. As shown in the chart below, the real value of the federal minimum declined sharply over the 1980s, and then further in the mid-2000s, before partly recovering with the fairly steep increases in the minimum wage in 2007-9.  But despite those increases and low inflation in recent years, it still remains well below its real value in the 1970s.

Federal Minimum Wage 2012 Dollars

There has been a significant policy shift, however, in how to guarantee a minimally acceptable income to families with low-wage workers.  In particular, the earned-income tax credit was instituted in 1976, and its generosity has since been expanded considerably.

Through the tax system, the earned-income tax credit pays benefits to families with low income and employed workers.  For example, in 2013 a low-income family with two children could receive a refundable tax credit of 40 percent of its income up to a maximum credit of $5,372. This maximum applied to families with income of $13,430, and it is phased out as their income rises. In addition, many states supplement this with their own earned-income tax credits. The benefits are a little higher for three-child families, a little lower for one-child families, and negligible for families with no children (a maximum of $487, or a subsidy of only 7.6 percent).  So like the minimum wage, the earned-income tax credit provides an income floor for working people that exceeds what they would earn in the absence of either policy.

Reflecting this change in how we support low-income families, federal government spending on the earned-income tax credit rose to $55 billion in 2011, about twice the spending on welfare.  The figure below shows the real minimum wage (as above), and the maximum credit for a household with two children. The policy shift is obvious. And indexing of the earned-income tax credit ensures that, unlike the minimum wage, it is not eroded by inflation.

Minimum Wage vs. Maximum Credit

So suggesting that federal policy addressing low-wage work and low-income families has somehow failed because the minimum wage has not kept pace with inflation ignores the fact that we have moved away from a focus on the minimum wage — a policy with many flaws — and toward the earned-income tax credit.  We shouldn’t be asking simply how much the real minimum wage has changed, but rather how much the combined income floor generated by the two policies has changed.

(Via Tyler Cowen.) For my own thoughts regarding the superiority of the EITC vis-à-vis the minimum wage, see here.

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