Lifting Workers Out of Poverty: The Minimum Wage versus the Earned Income Tax Credit

Brief Analyses | Work & Wages

No. 816
Monday, August 10, 2015
by Joshua Latshaw

San Francisco, Los Angeles, Seattle and New York State have all taken steps to establish a $15 an hour minimum wage. However, a $15 minimum wage will do far less to raise people out of poverty than the Earned Income Tax Credit (EITC) does currently. 

That is because the EITC efficiently targets those in poverty and does not distort the labor market. An individual is eligible for the EITC, either as a lump sum or advanced periodically by check, if he or she has an earned income below the ceiling set for their family size. Couples and families with children are eligible for a larger credit than single individuals.

Distribution of Beneficiaries. The purported goal of a large increase in the minimum wage is to raise the incomes of the poor and lift them into the middle class. Estimates from the Current Population Survey (CPS) show that about a quarter of workers earn less than $15 per hour. But the workers who would benefit are largely not poor [see Figure I]:

  • Thirty-four percent of the workers who would earn the $15 minimum
    wage live in a household making three times the poverty level, which
    translates to $72,750 a year for a family of four.
  • Almost 60 percent of the new minimum wage workers live in
    households with incomes twice the poverty level or higher, or $48,500
    for a family of four.

In contrast, the EITC supports the working poor in a much more targeted way:

  • Two-thirds of those benefiting from the earned
    income tax credit (EITC) earn less than 1.5 times the
    poverty level.
  • This includes a single parent earning less than
    $24,000 a year or a single person earning $17,000
    or less.

Minimum Wage Employment Effects. According to economists David Neumark and William Wascher, a 10 percent increase in the minimum wage, say from $7.50 to $8.25, will result in a 1 percent to 3 percent decrease in employment among the affected workers.


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