The economics behind raising the minimum wage in the United States are largely misunderstood. Increases in minimum wage prove to increase unemployment among unskilled workers, leading to a survival-of-the-fittest labor market, where only the most skilled and desirable workers retain their jobs. Those justifying raising the minimum wage need to realize there are innumerable people who cannot read, write, or socialize adequately enough to be paid wage premiums such as $15 an hour. A $15 minimum wage would disproportionately harm unskilled workers, especially teenagers or those with little experience, as these workers would be pushed out of the labor market first. According to Jeffrey Clemens and Michael Wither, two economists from the University of California-San Diego, approximately fourteen percent of the working-age population lost their jobs between 2006 and 2012 due to an increase in minimum wage (Clemens, Wither). There is no miraculous cure to poverty in America; however, raising the minimum wage will hurt those who are most desperate for help. There are alternatives to raising the minimum wage to help the financial plight of unskilled workers, such as increasing the Earned Income Tax Credit (EITC) or decreasing health insurance premiums.
Earned Income Tax Credit
The Earned Income Tax Credit, shortened to EITC, is a refundable tax credit for lower-to-middle income persons and families. A tax credit is a certain amount of money that taxpayers can subtract from taxes owed to the government if eligible. The EITC seeks to reduce poverty by moving people from welfare to work through the reduction of tax burdens, allowing individual and families to increase their real income. According to “The Earned Income Tax Credit: Overview, Economic Analysis, and Compliance Challenges,” written by Judith Collins, Eligibility for the EITC is dependent on a range of factors, “… including residence and taxpayer ID requirements, the presence of qualifying children, age requirements for childless recipients, and the recipient’s investment income and earned income. Tax filers with income above certain thresholds—these thresholds are based on marital status and number of qualifying children—are ineligible for the credit” (Collins). The EITC fluctuates based on a recipient’s earnings. The EITC encourages recipients to work harder, whereas raising the minimum wage may not increase working hours or productivity. Any person benefiting from the EITC becomes “better off” by working more hours or gaining a promotion because the credit increases alongside income, until it meets its set limit based on a person’s nominal income and number of dependents (Jacobson). Unlike a higher minimum wage, which forces employers to substitute unskilled workers for higher skilled workers and automation, EITC helps unskilled workers earn more and retain their jobs because unskilled workers’ additional pay comes from the government, not their employers.
Expanding the EITC seems feasible in helping low-skilled workers without hindering their employment because the EITC specifically targets these people, whereas, an increase of minimum wage benefits the highest skilled workers in the unskilled labor market. In order to receive the EITC, one must be employed; therefore, people are encouraged to retain their jobs. According to the Congressional Research Service (CRS), a public policy research institute of the United States Congress, in 2018, the EITC reduced the proportion of unmarried childless workers in poverty from 19.9% to 19.6%, proving a 1.5% reduction in poverty (Crandall-Hollick, Hughes). Additionally, the EITC, which targets full-time workers with children, proved to reduce the proportion of unmarried households in poverty with three children to 32.3%, a whopping 20.2% reduction (Crandall-Hollick, Hughes). Economists often look at the substitution effect and income effect when analyzing a change. Both the substitution and income effect are in full force when discussing EITC. When wages increase due to the EITC, so does the cost of leisure. According to the substitution effect, a worker will allocate more time on work and less time on leisure. Additionally, with a wage increase, a worker’s real income goes up, allowing them to consume more goods. Overall, the EITC may be a good alternative to increasing the minimum wage because it allows unskilled workers to take home more money without fearing unemployment as a result.
Decreasing Health Insurance Premiums
The effect of health insurance on poverty in the United States is difficult to assess as the need for health care and the benefits are not taken into account when measuring poverty levels. According to “Estimating the Effects of Health Insurance and Other Social Programs on Poverty Under the Affordable Care Act,” an article written by three professors in the Marxe School of Public and International Affairs at CUNY in New York, public health insurance benefits such as Medicare and Medicaid account for nearly one-third of the overall poverty reduction from public benefits. However, unskilled impoverished workers without dependents hardly received relief from these public programs (Remler, Korenman, Hyson).
The National Bureau of Economic Research finds that employers may have to offset the cost of employee benefits such as health insurance though lower wages, part-time workers, or automation. Employees who do not receive health insurance benefits, such as part-time employees, cost employers less money and may be substituted in place of a full-time unskilled worker (“The Effect of Rising Health Insurance Premiums on Employment”). Many unskilled workers recognize the staggering impacts of health insurance premiums on their paychecks.
The Affordable Care Act (ACA), sometimes referred to as Obamacare, enacted in 2010, hoped to make affordable health insurance available to more people, especially for lower income households, expand Medicaid, and support low-cost innovative health care. The ACA requires firms with more than 50 full-time workers to offer most employees with insurance according to the United States Department of Health and Human Services. However, when Billy Sewell, the president of Golden Corral, offered health insurance to over 600 service workers at his restaurants, very few signed up (Cowley). Many low-income households and unskilled workers are faced with the decision of buying insurance versus rent and groceries. However, many argue health insurance is a human need; therefore, decreasing health insurance premiums may help both employers and employees by lifting a financial burden.
Decreasing health insurance premiums may help unskilled workers by giving them access to health insurance without increasing unemployment. When government requires firms to offer health care benefits, employers cut out unnecessary employees, leaving part-time workers unemployed, or they hire more full-time workers and may even pay them to work more overtime, as the cost of benefits per hour of work is reduced; therefore, unskilled workers lose nearly every time. Expanding healthcare hurts low-skilled employees; therefore, it is feasible to decrease health insurance premiums.
Between raising the minimum wage, increasing the EITC and decreasing health insurance premiums, I personally believe expanding EITC is the most viable option to help low-skilled workers without causing the hardships of unemployment. The EITC is specifically targeted to help low-skilled workers. In contrast, raising the minimum wage causes a “survival of the fittest” situation in the labor market, leaving the most unskilled, vulnerable workers unemployed. Although declining health insurance premiums can help unskilled workers, I believe this method is less effective than increasing EITC. The EITC has proven to be effective as it encourages and rewards low-skilled workers, while simultaneously offsetting payroll taxes. As of December 20191, twenty-nine states have established their own EITCs (“Policy Basics: The Earned Income Tax Credit”).
I believe every state should adapt their own EITCs to supplement the existing federal credit. The EITC has reduced poverty, especially in families with children, by raising them above the federal poverty line. The EITC keeps unskilled workers in the labor market while concurrently increasing their income.
- “Affordable Care Act (ACA) – HealthCare.gov Glossary.” HealthCare.gov, www.healthcare.gov/glossary/affordable-care-act/
- Clemens, Jeffrey, and Michael Wither. The Minimum Wage and the Great Recession: Evidence of Effects on the Employment and Income Trajectories of Low-Skilled Workers. National Bureau of Economic Research, 2014.
- Collins, Judith L. The Earned Income Tax Credit : Overview, Economic Analysis, and Compliance Challenges. Nova Science Publishers, Inc, 2016.
- Jacobson, Andrew. ‘Evaluate Alternatives to Raising the Minimum Wage.’ University Wire, Oct 24, 2016. ProQuest, https://search.proquest.com/docview/1831696919?accountid=8361.
- “Policy Basics: The Earned Income Tax Credit.” Center on Budget and Policy Priorities, Dec 10, 2019. https://www.cbpp.org/re