EITC vs. Minimum Wage

EITC vs. MINIMUM WAGE….Which is a better way of increasing the incomes of the working poor, the minimum wage or the Earned Income Tax Credit? Brad DeLong says it’s both:

The right solution, of course, is balance: use the minimum wage as one part of your program of boosting the incomes of the working poor, and use the EITC as the other part. Try not to push either one to the point where its drawbacks (disemployment on the one hand, and administrative error on the other) grow large. Balance things at the margin.

I think this is exactly right. There are plenty of good wonkish reasons why the EITC is a good thing, but at the same time Brad is right that it’s hard to administer and doesn’t apply to everyone. I’d add that, in the end, it also amounts to writing a check to poor people, and for a variety of reasons there’s a limit to how much we should do that.

The minimum wage, on the other hand, wields a broader brush than the EITC and puts money directly in workers’ pockets without any taint of being a handout. What’s more, as Brad says, the evidence indicates that a moderate minimum wage has very little effect on employment and the cost of the minimum wage is spread pretty widely among customers of firms that employ minimum-wage workers ? which is pretty much all of us.

Programs to help the poor are tricky things, and I’d take it as a general rule that we’re usually better off with lots of little (or moderate size) programs than we are with a few large ones, which almost inevitably produce serious social problems of some kind when they’re scaled too large. I like the EITC, but I’m also in favor of John Kerry’s proposal to increase the minimum wage ? and I’d index it to inflation in some way while I was at it. It’s good, Christian stuff.