Wall Street Journal | April 11, 2018 | David Neumark
President Trump issued an executive order Tuesday encouraging federal agencies to adopt more-stringent work requirements for various welfare programs. What can Congress do to encourage work? Two possibilities are increasing the minimum wage and expanding the earned-income tax credit. My recent research shows that these two policies can have very different, and perhaps unintended, effects on the ability to become economically self-sufficient over time.
Wall Street Journal | September 25, 2017 | David Neumark
Does the minimum wage destroy jobs? The debate over that question often reduces to dueling economic studies. One side cites analyses showing that employers respond to a wage floor by cutting hours or jobs. The other side pulls out studies saying the minimum wage is a free lunch for workers. To really understand what’s going on, you need to get under the hood.
The earned income tax credit stands out as the most effective pro-work, anti-poverty policy the United States has devised. California is among 27 states that offer an additional state EITC on top of the federal credit. However, due to its unusual structure and the new statewide minimum wage increase, its effectiveness will soon be undermined as people work fewer and fewer hours to qualify for large EITC payments. An increase in the minimum wage should be matched by an increase in how much families can earn and still qualify for the Cal EITC. Assembly Bill 225 sets forth just that.
The job losses from a $15 minimum wage mean that it will not alleviate poverty, but will simply redistribute poverty. While poor workers who keep their jobs may be lifted out of poverty by a $15 minimum wage, other near-poor workers who lose their jobs or have their hours cut will be plunged into poverty. The misery just gets shuffled around.
Standard economic theory holds that when the costs of low-wage workers are raised by a higher minimum wage, employers reduce employment — for two reasons. First, employers suddenly find it economical to replace, say, two minimum-wage workers with one slightly more expensive, presumably more experienced or efficient worker. (One $25-an-hour worker may be a better deal than two $15-an-hour workers.) Second, the rising cost of salaries leads employers to raise prices, which leads to lower demand, meaning they have to lower overhead by reducing head count.