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Tuesday, January 11, 2011

Increase the Minimum Wage and EITC

A Proposal to Raise Minimum Wage to $12.30 an Hour
and to Double the Earned Income Tax Credit

For each and every human in the U.S. our economy each year generates about $46,000. For each and every worker, full-time and part-time, the economy generates over $100,000 a year. Should any worker receive a below poverty income in this wealthy nation? Should any worker receive an inadequate income? The official poverty level and the “basic budget” adequacy level are two separate levels. The adequacy level is about twice the poverty level. Should economic insecurity be the persistent curse and nemesis of all low-income workers in an economy so rich? This report by the two scholars at University of Massachusetts, Amherst, articulates a solution to these problems that plague the families of low-income workers in the U.S.A.

The report: Combining Minimum Wage and Earned Income Tax Credit Policies to Guarantee a Decent Living Standard to All U.S. Workers, by Jeannett Wicks-Lim and Jeffrey Thompson, PERI, Political Economy Research Institute, University of Massachusetts, Amherst, October 2010

Jeannette Wicks-Lim and Jeffrey Thompson propose to raise the incomes of all working low-income families by two methods. “Specifically, we begin by proposing a 70 percent increase in current minimum wage rates. This would raise the federal minimum from today’s rate of $7.25 to $12.30 per hour. We also propose two expansions of the EITC [Earned income Tax Credit], the federal program that provides tax relief and cash benefits for low-income working families. These include raising the maximum EITC benefits by 80 percent and the income eligibility threshold to three times the federal poverty line. The maximum EITC benefit would rise from $5,028 to $9,040 and households with incomes up to $57,000 could receive benefits.”

This chart comes from Center on Budget and Policy Priorities, a report from 2011.

It is important to note at the outset that this program would raise the incomes of only 4 percent of the nation’s families, out of 26 percent whose incomes are below adequacy. Incomes would rise sufficiently to provide a “basic budget” for their living expenses. Twenty-six percent of the nation’s families live below the “basic budget” adequacy level, and owing to the fact that part-time work is typical of these households, raising their incomes based primarily on their work participation only raises one in six of these families’ incomes to the adequate level. The authors claim if full-time employment were available to all families and workers then not 4 percent but 15 percent of the nation’s low income households would be benefit enough to raise their incomes to the adequate level, leaving 11 percent still below adequacy.

The current minimum wage income of $7.25 an hour provides an annual income of $15,080 to full-time full-year workers. Wicks-Lim’s plan would raise that base income to $25,584, a 70 percent increase. Coupled with a maximum $9,040 EITC benefit, certain eligible families would achieve a $34,624 base annual income. Currently the maximum minimum wage annual income with benefits is $20,108. This present $20,108 maximum is still $2,000 below the official poverty level for a family of four. And it is far below, about half, an adequate level. A $14,500 boost to low incomes to $34,624 would effect a large sector of American families. But “poverty level” and “adequacy” level are two different levels.

The Citizens for Tax Justice provides this break down of incomes according to income tax filers in 2009:

A Tale of Two Payroll Tax Breaks
Making Work Pay 2% payroll tax rate cut
(I apologize that his chart is difficult to reproduce. Read the five income groups, their range of income and their average income.)
Lowest 20% Less than $20,000 --- $ 13,000
Second 20% $20,000 – 33,000 --- 26,100
Middle 20% $33,000 – 53,000 --- 42,000
Fourth 20% $53,000 – 88,000 --- 68,800
Next 10% $88,000 – 127,000 --- 104,800
Next 5% $127,000 – 177,000 --- 147,300
Next 4% $177,000 – 458,000 --- 256,500
Top 1% $458,000 or more --- 1,397,100

Source: All tax cut figures are from the ITEP Tax Model, Dec. 7, 2010
Citizens for Tax Justice, Dec. 7, 2010

The effect of this plan would raise income for all full-time workers into the middle quintile of the nation’s income bracket. But most below poverty level wage earners do not work full-time year-round. “In 2009, the U.S. Census Bureau reported that 42 percent of nearly 21 million poor households [18 percent of all U.S. households] had at least one member working full-time year-round.” Restated: of the 21 million below poverty households, 42 percent had someone working full-time. Raising them to above poverty does not raise them to “income adequacy.” Only 4 percent are raised to adequacy by this W-L and T proposal. (footnote: “U.S.Census Bureau, 2009 Detailed Poverty Tables http:/; accessed March 19, 2010. We use the Census Bureau’s tabulation of households below 200 percent of the federal poverty income threshold for this figure.”)

This deserves another look. About 1 in 6 households are poor, about half have someone working full-time. That indicates 1 in 12 (8.3%) of U.S. households with someone working full-time are still living in official poverty. There is some data here complicating my interpretation. If 8.33%, or 1 in 12, have their incomes raised by a doubling of EITC and a 70% increase in the minimum wage, yet still Wicks-Lim and Thompson state that only 4% of households will be raised to an adequate level? Perhaps the increase in wages and EITC is still not sufficient to rise to adequacy.

I went to the Economic Policy Institute and looked at their Basic Family Budget Calculator to find that across the nation different incomes are needed to achieve adequacy. For instance, in Pine Bluff, Arkansas, a four member household needs just $25,933 for adequacy, and the official U.S. poverty level is a little above $22,000 in 2009. Other locations naturally differ: Madera, CA $31,177; Salt Lake City, UT, $31,898; Asheville, NC, $33,673; Akron, OH, $34,290; Philadelphia, PA, $36,810; Los Angeles, CA, $40,770; Oakland, CA, $53,590; NYC, NY, $56,257; the same family in Washington, D.C. needs $58,942. (The EPI’s Basic Family Budget amount is very close to 200% of the federal poverty level.)

In all, 24.8 million families receive the EITC benefit, about one in five of all families in the U.S.. All these families would benefit from the Wicks-Lim and Thompson plan. Presently EITC benefits are lowest for the lowest income earners --- and if you have no earned income, you receive no EITC benefit. Beginning from one earned dollar, the benefits reach a maximum plateau at $12,000 to $16,000 a year income, the benefit adds about $5,000. After $16,000 the benefits are reduced, they then taper down to zero benefits at $40,000 a year.

The larger picture is drawn clearer in the conclusion that states only 4 percent of the 26 percent of households with inadequate income will be raised above inadequacy.
From the conclusion:
“Our policy proposals address one of the crucial elements of an economic policy framework that aggressively pursues the goal of raising all U.S. households to a decent living standard: decent pay. . . . [T]he degree to which these policies can move families toward a decent living standard hinges on the number of hours they actually work.” As to the question of how great an improvement this proposal would make, “We estimate that our proposed expansion will reduce the percentage of low income families with inadequate incomes from 26 percent to 22 percent.”
And if full-time year-round employment were available? “If all household heads and their spouses (if present) in low income households worked full-time year-round, we would expect a drop off of close to 15 percentage points, so that the percent of low-income households would fall from 26 percent to 11 percent. Inadequate employment is clearly a significant barrier to families achieving a decent living standard.”

Two concepts are important here: There are not enough jobs, and many workers have too few hours of work. It would take both parents working to achieve adequacy. This is why policy advocates for full-employment through federal government job creation programs have long fought for full-employment laws. The effect of World War II government employment programs brought the unemployment rate to below 2 percent for the years 1943, 1944, and 1945. Full employment is achievable, though it is not popular with “free market” capitalists and the advocates of high inequality.

The Wicks-Lim and Thompson plan devotes analysis to the tipping point maximum increase in the minimum wage before it creates harmful effects on hiring. Much of the report details the effect on business. “The overall body of empirical evidence suggests that past minimum wage and living wage increase have not lead to significant job losses. In fact, Doucouliagos and Stanley (2007) concluded after analyzing over 64 separate studies on this question published between 1970 and 2007 that there is 'little or no evidence of a negative association between minimum wages and employment...’ Their conclusion is consistent with Harvard economist Richard Freeman’s assessment of the state of knowledge on this question 15 years earlier, ‘The debate is over whether modest minimum wage increases have ‘no’ employment effect, modest positive effects, or small negative effects. It is not about whether or not there are large negative effects.’”

By raising the minimum wage level, a two income family could earn up to $51,168 if both workers held full-year full-time employment. But in some high-expense localities this income would not achieve the basic income level. In single adult families, 1 adult with either one or two children, the minimum wage income alone would not achieve the basic budget level. For these exceptions the EITC is the policy method for lifting incomes to the basic level in certain geographical localities.

(The maximum EITC benefit for childless workers is currently less than $500 a year. A shortcoming of the report is its failure to address this minor issue. Millions of single, unmarried workers are paying child support payments without the benefit of the EITC, and even if not paying child support, their incomes are not commensurate with their work value. This is to say, the market wage rates are artificially low and do not adequately provide. There is no reason the nation could not systematically raise the minimum wage to $20 an hour or higher after two decades of system-wide wage increase. It is simply a political decision of our democracy. I should remind the reader, each of the 140 million workers who work each day of the year, including the 36% who are part-time workers, on average generate over $100,000 of value per year. But politically low-wage, low-income workers do not have political supporters.)

Currently, even in a family with two full-time full-year working adults with one child, their combined income is still $10,000 below the necessary basic budget amount --- $30,000 when they need $40,000. If they have two children they are short $16,000. Single parent families with one or two children fall short by $18,000 and $25,000, respectively. The top EITC benefit of $5,028 does not bridge that gap.

In today’s economy 36 percent of workers, about 50 million, are part-time workers. Not all want full-time work, only about 10 million state that preference.

The cost to the government of an increase in the EITC would equal $51 billion, and would about double the current expense to about $100 billion a year. In perspective, according to the report, about 45 percent of the Bush tax cuts were received by the top income 5 percent of households. If one fifth of the Bush era tax cuts were repealed, the taxes raised would fund this program. Therefore, just cutting the top 5 percent’s tax cut by half would fund the program.

Another perspective: The recession beginning in December of 2007 resulted in a total of over $1 trillion of lost income accrued to the families who lost work due to the recession. Eight million jobs were lost. The employment drop-off since the beginning of the recession, January, 2008, will effect a family income drop-off of approximately $1 trillion over a five year period, January 2008 to January 2013, about $200 billion a year. Raising the EITC by $51 billion would help the still employed, but not the unemployed. With $200 billion a year we could fund a federal jobs program costing $150 billion a year, employing 3.75 million unemployed workers at $40,000 a year, and double the EITC benefit and still see a net savings. This September, 2009, report,by Dean Baker and John Schmitt, “A Trillion Dollar Wage Deficit”, from the Center for Budget and Policy Research, draws its data from CBO income and employment projections. Corporations are said to be sitting on $2 trillion of savings, and the wealthiest 1 percent of households hold over $20 trillion in assets, most of which is stuck in unproductive speculative financial markets. The nation can chose, if it wishes, it is not a matter of not enough funds, it is a matter of lack of political will.

Achieving full employment is a more powerful method of poverty reduction than the EITC increase coupled with the minimum wage increase. But in 1968 the minimum wage stood at $9.86 an hour in present day dollars, so increasing it to $12.30 an hour is just a 27 percent increase. And the increase in the EITC program amounts to a 1.8% increase in the federal budget.

This plan makes a powerful impact on American lives, it is money well spent. In 2006 the bottom 80% of households earned in wages and salaries only 28.2% of the entire national income. This is not wise nor is it fair. It is arbitrary.

The bottom 20% of households received only 2.5% of the nation’s income, the next 20% received 6.4 percent, and the middle 20 percent received 11.4 percent, for a total of 20.3 percent going to the bottom 60 percent of households (the income of the top one percent of households nearly equaled the income of the bottom 60%, they received 18.4% of the nation's total income versus 20.3% going to the bottom 60% of households)(See Table 1.17,, chapter one, 2006-2007, Mishel, Bernstein and Allegretto, from Tax Policy Center Microsimulation Model, page 79 in the book State of Working America, 2006/2007). Moreover, this same bottom 60 percent of households owns only 2.3 percent of the nation’s household wealth (Edward Wolff, see Levy Economics Institute, March 2010). The average net worth of families in the bottom 40%, according to Wolff, per household in 2007 was $2,200. That was before the recession.

We may be the chintziest nation on earth and in recorded history. Low income workers need a pay raise and a savings plan. This plan by Wicks-Lim and Thompson importantly advances the discussion and at last provides some economic justice. As they point out, “In 2009, the U.S. Gross Domestic Product per capita was $45,918 (” Multiply $45,918 by 310 million Americans to reach a Gross Domestic Product of $14.2 trillion. Each day 140 million Americans go to work, each year each worker (including part-time workers) produces over $100,000 in value. We can afford to pay every full-time full-year working man or woman a higher income than $15,080 a year (the minimum wage) or $20,108 with the maximum EITC benefit (if they qualify). And then, we can afford to provide every willing adult a full-time job that pays a decent income. And then we can afford to provide incentives so that all families can have wealth, not the measly average of $2,200 of savings that the bottom 40% of families (comprised of 124 million Americans) now has. ("Moreover, the average wealth of the poorest 40 percent declined by 63 percent between 1983 and 2007 and, by 2007, had fallen to only $2,200.” From Edward Wolff's report, Levy Economics Institute, March 2010, page 33.) As an adjunct, see this report, Why President Obama Should Care About “Care”: An Effective and Equitable Investment Strategy for Job Creation
In his State of the Union address President Obama acknowledged that “our most urgent task is job creation”—that a move toward full employment will lay the foundation for long-term economic growth and ensure that the federal government creates the necessary conditions for businesses to expand and hire more workers. According to a new study by Levy scholars Rania Antonopoulos, Kijong Kim, Thomas Masterson, and Ajit Zacharias, the government needs to identify and invest in projects that have the potential for massive, and immediate, public job creation. They conclude that social sector investment, such as early childhood education and home-based care, would generate twice as many jobs as infrastructure spending and nearly 1.5 times the number created by investment in green energy, while catering to the most vulnerable segments of the workforce.