Better Together: The Minimum Wage and Earned Income Tax Credit

Back • May 10, 2012 • Uncategorized

Last year, the Governor and the General Assembly approved a new state Earned Income Tax Credit (EITC) that provides a boost for low-wage working families.  Unfortunately, last night, time ran out on another bill that would help low-wage workers by raising Connecticut's minimum wage. In the discussion over how to make work pay for all Americans, sometimes people talk as though we must choose either to increase the minimum wage or the EITC. However, a new report by economists at the University of Massachusetts finds that the two programs work better together.

In a study of the effects of the minimum wage and EITC on single mothers, the prime target of these measures, Jeannette Wicks-Lim and Robert Pollin establish three main findings:

  • Both the minimum wage and EITC are associated with higher employment levels. The main argument against the minimum wage is that it may cause job losses by raising the costs of doing business. But we found that improving wages with a 10-percent minimum wage hike actually increased by 1 to 2 percent the proportion of low-credentialed single mothers both seeking and finding jobs. In addition, a 10-percentage point increase in a state’s EITC benefit rate raises average weekly employment levels for low-credentialed single mothers by between 1 and 2 hours. 
  • The minimum wage and EITC strengthen each other’s positive effects. A 10-percent minimum wage hike, on its own, raises weekly earnings for low-credentialed single mothers by between 8 and 11 percent. An above-average 14-percent EITC rate operating at the same time builds on these gains, raising earnings an additional 3 to 4 percent. This likely occurs because the higher employment levels supported by relatively generous EITC benefits broaden the number of single mothers whose pay improves with a minimum wage hike.
  • Both policies must be increased well beyond current levels to ‘make work pay.’ A 10-percent minimum wage hike combined with an above-average 14-percent state EITC rate would raise the income of a representative low-wage single mother by about $2,100 — from about $21,100 to $23,200. Still, $23,200 falls fully 44 percent below the basic budget income level of $41,400 for a 3-person family. It is therefore imperative to build from the complementarities between the minimum wage and EITC to establish decent living standards for all U.S. employees.”

We hope that next year, state policymakers take the opportunity to combine the effects of these two effective measures by approving a minimum wage increase that is indexed to inflation.