The Earned Income Tax Credit (EITC) and minimum wage work together to reduce poverty and raise incomes, according to a new report by IRLE director Jesse Rothstein and Ben Zipperer of the Economic Policy Institute.
The two policies, in many cases, may be more effective together than either is on its own, the report states.
A full-time single parent earning the federal minimum wage of $7.25 an hour earns about $15,000 a year, far too little to support a family of two children. Yet the current EITC refund for that parent adds 39% to pretax earnings, lifting the family above the poverty line.
The EITC aims to supplement workers’ earnings, but risks being diluted if low-wage employers react to it by reducing wages. However, a sufficiently high minimum wage can prevent this dilution, ensuring that low-wage workers receive the full benefit of the EITC. In the other direction, an EITC can raise earnings above the low floor guaranteed by the minimum wage, which cannot plausibly be raised high enough to generate livable incomes for many families without additional supplementation.
“Policy discussions often treat EITC expansion and raising the minimum wage as alternatives, from which we should choose just one. However, this is a misconception,” said Rothstein. “EITC and the minimum wage policies complement one another to boost a worker’s earnings more than wages alone can.”
In 2018, over 22 million working families and individuals received the credit, with the average value of $3,191 for families with children. The structure of the EITC refund is designed to increase the incentive to work. Previous research finds that the EITC contributed substantially to a dramatic rise in single mothers’ labor force participation in the 1990s. And evidence indicates that it improves maternal and child health and well as children’s educational outcomes.
The authors note that some states have already taken action. In 2019, all six states that expanded their state-level EITCs also have raised—or will soon raise—their state minimum wage significantly above the federal floor.
“When thinking about policies to reduce poverty, policymakers should consider both raising the minimum wage and expanding the EITC, to help the most working people possible,” said Zipperer. “Used together, these two policies’ strengths complement each other and significantly improve the lives of low-income families.”
The Institute for Research on Labor and Employment (IRLE) at UC Berkeley connects world-class research with policy to improve workers’ lives, communities, and society.