An Alternative Way to Boost the Wages of Low Income Workers

 

Several days ago I had a post entitled “A Rational Approach to a National Minimum Wage,” in which I expressed support for a national minimum wage level of somewhere between $8.00 and $9.00/hour combined with an expansion of the Earner Income Tax Credit program to single, childless workers, paid for by tightening up on the EITC payment methods.
CaptureThere is an interesting alternative to this combined minimum wage/EITC approach.  It is the so-called wage subsidy program described in the book, “Rewarding Work: how to restore participation and self-support to free enterprise” by the economist Edmund Phelps.  Click here for a short summary.
The idea is that low wage work would be directly subsidized by the government to the employer.  A firm employing low-wage workers, let’s say from $7.25 up to $10.00/hour, just to be specific, is paid a subsidy for each such employee on a sliding scale.  The higher the wage is, the lower is the subsidy, until it has tapered off to zero.  The subsidy is paid to the firm once a year as a nonrefundable credit against taxes.  Competitive forces would ensure that most of the subsidy would be paid out to the low-income workers as higher wages. Mr. Phelps gives a persuasive argument that his program is a much more efficient way to increase low-income employment than either a minimum wage or the EITC.
It is unrealistic to expect a rollback of our current minimum wage of $7.25/hour.  However, a wage subsidy could take the place of an increase in the minimum wage.  Raising the minimum wage, even to $9.00/hour, is predicted by the CBO to lead to a loss of 100,000 jobs.
Likewise, as Mr. Phelps says, the EITC “program is not really a tool to reward and stimulate the unemployment of low-wage workers so much as a program of credits for those who, for whatever reason, have low wage incomes.”
Conclusion: a wage subsidy creates low-income jobs and boosts their pay by making it profitable for businesses to hire low wage workers and pay them well.  Such a program, a la Phelps, would need to be carefully melded with our current EITC program to achieve maximum cost efficiency.

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