Raising minimum wage isn’t best way to boost employee income, Baker Institute expert says

EXPERT ALERT

Jeff Falk
713-348-6775
jfalk@rice.edu

Raising minimum wage isn’t best way to boost employee income, Baker Institute expert says

HOUSTON – (Sept. 19, 2019) – The U.S. House of Representatives recently passed the Raise the Wage Act of 2019, and raising the minimum wage is likely to be a central debate of the 2020 election cycle. But is it the best option for employees and employers?

Credit: 123RF.com/Rice University

John Diamond, the Edward A. and Hermena Hancock Kelly Fellow in Public Finance at Rice University’s Baker Institute for Public Policy, argues that revamping and increasing the earned income tax credit (EITC) is a better alternative. He outlined his insights in a blog post, “Is raising the minimum wage the only option?” and is available to discuss the issue with the news media.

In July 2019, the Congressional Budget Office (CBO) published a report examining the effects of increasing the federal minimum wage from $7.25 to $10, $12 or $15 per hour by 2025, and there is a considerable amount of uncertainty about how a higher minimum wage would affect low-wage workers, Diamond said.

“The CBO’s median estimates show that the number of workers below the poverty threshold in 2025 would only fall by 1.3 million with a higher minimum wage,” Diamond wrote. “This indicates that the policy does not appear to be well targeted in terms of reducing poverty partly because, as CBO reports, 42% of low-wage workers are in families with incomes of more than three times the poverty level.”

According to the CBO, this policy is projected to decrease total family income by $8.7 billion. This decrease can be broken down to show the winners and losers, Diamond said.

“In particular, CBO projects (under the median estimates) that the real earnings of workers who remain employed would increase by $64 billion and the real earnings of the total number of workers who lose their jobs would decrease by $20 billion,” he wrote. “Real income for business owners would decrease by $14 billion and the real income for consumers would decrease by $39 billion (as a result of the increase in prices for goods produced by low-wage workers).”

This leaves a considerable amount of uncertainty surrounding how a higher minimum wage would affect low-wage workers. However, there is a viable alternative to increasing the minimum wage, Diamond said: increasing the EITC.

“Most importantly, the EITC is funded from general funds, so a single group is not unfairly burdened with the cost of implementing the policy,” he wrote. “This is not true for the minimum wage.”

In the case of the minimum wage, the employers of low-wage workers are responsible for the mandated wage payments. Employers can raise prices to shift part of the burden to consumers, reduce the number of workers they hire or reduce other non-wage benefits to try to avoid this burden. But the fundamental question, Diamond said, is why should the employers of low-wage workers be solely responsible for this burden, especially given that small businesses often claim to be unable to withstand such burdens?

“Given the uncertainty surrounding the economic effects and the poorly targeted benefits and burdens of a minimum wage, it is unlikely to be the best policy to increase the wages of low-wage workers,” he wrote. “Instead, increasing and expanding the EITC to increase the earnings of low-wage workers is likely a better policy option, even after modifications to the EITC to deal with its treatment of households that vary by size and makeup.”

For more information or to schedule an interview with Diamond, contact Jeff Falk, associate director of national media relations at Rice, at jfalk@rice.edu or 713-348-6775.

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Related materials:

Blog post: blog.bakerinstitute.org/2019/09/09/is-raising-the-minimum-wage-the-only-option

Diamond biography: bakerinstitute.org/experts/john-w-diamond

Baker Institute Center for Public Finance: bakerinstitute.org/center-for-public-finance

Founded in 1993, Rice University’s Baker Institute ranks among the top three university-affiliated think tanks in the world. As a premier nonpartisan think tank, the institute conducts research on domestic and foreign policy issues with the goal of bridging the gap between the theory and practice of public policy. The institute’s strong track record of achievement reflects the work of its endowed fellows, Rice University faculty scholars and staff, coupled with its outreach to the Rice student body through fellow-taught classes — including a public policy course — and student leadership and internship programs. Learn more about the institute at www.bakerinstitute.org or on the institute’s blog, http://blog.bakerinstitute.org.   

About Jeff Falk

Jeff Falk is associate director of national media relations in Rice University's Office of Public Affairs.