In today’s world, a popular demand by United States citizens is for raising the minimum wage.
It is now a prevalent political movement, and a group known as the Fight for $15 (a movement that strives for setting the federal minimum wage to 15 dollars an hour), has sparked protests in cities across the United States beginning in New York in 2012. However, in looking at economic trends, it appears that raising the minimum wage might not be the best route to take if the end goal is to help low-wage workers. Creating such a price floor on the labor market may instead lead to higher unemployment and lost gains from trade. It seems like the United States would be better suited to pursuing a different option: raising the Earned Income Tax Credit (EITC) for low-wage workers, because it would encourage employment while also allowing the market and natural laws of supply and demand to find an equilibrium price on labor so that both employees and employers can maximize their gains from trade.
The EITC is a credit to those in the low-income workforce.
Originally introduced in 1975, the goal of the credit was to entice nonworking people (particularly nonworking mothers) into the workforce to decrease reliance on cash welfare programs. The amount that is awarded is dependent on factors such as how many children you have and whether you are married. It increases the lower your income is, and there is a maximum credit limit as well. The EITC is often considered to be one of the most effective antipoverty programs in the US. Its effectiveness also targets the people that it was truly intended for: low-income families who live below the poverty line. It has succeeded in bringing millions of people above the poverty line annually due to its targeted approach. This approach contrasts the minimum wage, which requires everyone, regardless of age and dependency status, to be paid more than they otherwise might be willing to work for. This in effect causes lost gains from trade since the lower-skilled workers who are most in need of the money may no longer be able to get a job, even if they are willing to work for less money than the minimum wage.
Another benefit in increasing the EITC instead of the minimum wage would be that it encourages employment, whereas increasing the minimum wage can in effect do the opposite and cause unemployment. The EITC has succeeded in boosting employment rates, especially in the groups it is targeted for. It also incentivizes working, and rewards those willing to work and improve their skills. On the other hand, many economists argue that increasing the minimum wage, especially drastically, would cause labor surpluses (unemployment) because employers will not want to pay the higher wage, and would therefore respond in a couple of different ways. They may invest in machines or other technology that can improve production while decreasing the amount of workers they need. Or, they may simply cut their production levels so that they do not need to pay as many employees.
Still, there are those who advocate for a minimum wage increase to help alleviate the struggles of low-income workers. Those who are in favor of a minimum wage increase argue that the core reason for wanting the minimum wage to be present and to be increased to a “living” wage is for social reasons: to protect people from being exploited, which was the original reason the minimum wage was put into effect. There are also those who argue that because the federal minimum wage is so slow to rise, it has created a large gap in pay equality between the lower class and middle class workers. They argue that raising the wage would help lessen this wage inequality.
Despite these arguments, there remains something to be said for the efficacy of the EITC at its targeted group when compared to the effects of the minimum wage. Raising the minimum wage may appear to help people at first, however, the real income raise that they are getting would likely soon be the same or perhaps even smaller than the original nominative increase due to business owners raising prices to cover rising labor costs. The EITC, on the other hand, would not be susceptible to this, as it is funded by all taxpayers, and would not have as drastic of an effect on businesses and entrepreneurs to where it would affect the market. That, along with it not contributing to issues such as unemployment or lost gains from trade, assures that raising the EITC is a better route to take in closing the gap in incomes and targeting those in the most need.