The most damning aspect of Tuesday’s CBO report on the minimum wage may not be its acknowledgment that raising the minimum wage is a highly inefficient way to help families in poverty relative to subsidizing work with the Earned Income Tax Credit (EITC). The most damning aspect is the report’s implicit acknowledgment that raising the minimum wage hurts marginal workers by reducing their chances for employment.
The report estimates that raising the minimum wage will imposed three times as many job losses on marginal workers as adults generally. Nevertheless, the report concludes that overall job losses suffered by marginal workers are likely to be low because few marginal workers currently have jobs. Twenty-three percent of African-American workers between the ages of 20 and 24 years old, for example, are unemployed. For the least skilled among those workers, the unemployment rate is even higher. Those workers are unable to produce $7.25 of value in an hour of work—the amount of the minimum wage—that customers are willing to buy, and so remain unemployed. Raising the minimum wage to $10.10 per hour will make it that much harder for those workers to find economically viable work. So in addition to the 500,000 workers who can produce $7.25 of value in an hour but not $10.10—individuals who the CBO expects will lose their jobs outright—there are many currently unemployed workers who will find it even harder to find work, especially low-skilled entry-level work that serves as a gateway to a lifetime of employment.
Liberals, such as the editorial page of the New York Times, downplay this concern and argue that an increase in the minimum wage rather than the EITC is needed to prevent employers from pocketing the benefits of lower wages subsidized by the EITC. To a large extent, competition makes it difficult for employers to pocket subsidies rather than passing the savings to their customers through lower prices—especially in industries where competition demands minimum wages. Lower prices increase the demand for products made with minimum wage labor, which increases minimum wage employment. If some companies hire more low-skilled marginal workers eligible for the EITC, namely single mothers, because they can pocket the subsidies, it would be a nice problem to have.
In short, increasing the EITC is a lot cheaper way for taxpayers to help families in poverty and a lot less destructive to marginal workers than raising the minimum wage.