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Richmans' Trade and Taxes Blog
Eliminate the Minimum Wage; Substitute a Revised Earned Income Tax Credit
Most economists believe that the minimum wage increases unemployment among unskilled and young workers. Unions and their economists are strong backers, even though none of their members earns less than the minimum wage. Their reasons are Machiavellian; they don’t want competition from persons earning less than their members earn.
As the following table shows, unemployment rates among workers between the ages of 16 to 19, black and white, have three times the unemployment rates of whites and blacks in the labor force. The rate of unemployment of black teenagers is a staggering 38.4 percent. The Obama administration’s monetary and fiscal policies have created enormous benefits for shareholders as the booming stock markets show. They have benefited blacks, particularly black teenagers very little or not at all. The rich have benefited and so have businesses catering to the rich, but the poor have gotten poorer. Only today, as we write this, the US Bureau of the Census confirmed that there are more Americans with incomes at the poverty level than before the recession.
The minimum wage is part of the problem. It has prevented the employment of teenagers and the unskilled particularly.
Working individuals with levels of earned income below the poverty level are given assistance by the Earned Income Tax Credit. The credit is an effective program for low-earnings families with children, not so good for single individuals.
In 2012, a family with three children received a payment of $5,891 equal to 40.8 percent of earned income of $14,450. For single workers, the maximum payment is $475 and begins to decline when earned income is greater than $7750, equal to 6.1 percent. It is a welfare program but not much help for single individuals. It ought to replace the minimum wage which has awful economic effects but to do so, benefits of the earned income tax credit needs to be increased for single workers. In 2012, a single worker earning $100 per week received $400 or $8 a week.
The median wage of waiters and waitresses and food preparation workers in the Spring of 2009 was estimated to be about $8.50 per hour. It is probably about the same at this writing given that the economy has stagnated. The federal minimum wage currently is $7.25, and it is higher in a few states.
The minimum wage is a poor policy to improve the lot of workers. An estimated 79 percent of economists in a 1992 survey, agreed that the minimum wage increases unemployment among low-skilled workers. What we need is a policy that encourages the employment of unskilled workers and rewards those seeking work enough to overcome resistance because the incentive is too low.
It seems unfair for Congress to enact a minimum wage and cause the unskilled to be unemployed. What are the possible solutions? One solution that has been recommended is to teach the unskilled a trade. But there may be no demand at all for people with skills or it may be insufficient. Currently, many skilled construction workers are without jobs. Many with community college and Bachelor of Art Degrees are without jobs. In any case, when the unskilled enter a low-paying job, they learn the discipline required and learn new skills. At any rate, many graduate from unskilled jobs to better paying jobs by on-the-job training.
Perhaps, the earned income tax credit could be re-structured from an entitlement program program to an effective instrument for encouraging the hiring of unskilled.
What changes wold be required? The unemployed should be rewarded when he finds a job and employers who hire unskilled workers should be compensated for the expense of training new workers. What kind of rewards would do the job and how much would it cost?
Since the government believes everyone employed should earn the minimum wage one possibility is for the US to offer employment at the minimum wage to every one wanting to work. This would not necessarily be expensive. The government could offer to lease their services to potential employers. The government may receive less than the minimum wage and would absorb the difference. This is equivalent to repealing the minimum wage. This is certainly fairer that the minimum wage law which cause unskilled workers to be unemployed. The minimum wage puts the entire burden on the workers who are unable to find work at the minimum wage.
The government could terminate the earned income credit for workers with children. Workers employed at $6 per hour would receive a credit raising him to the federal minimum wage, currently $7.25, a 20.8 percent increase. All workers would receive a $1.25 increase up to a wage of, say, $15 per hour. If the government wants to provide a welfare payment to employed workers with children in addition to the deduction for dependents which they also get, it should do so as a government expenditure, not as a credit.
We believe that no subsidies should be given in the form of an income tax credit, not to families and not to crony businesses. The use of the tax credit as a subsidy should in the interest of transparency be known to taxpayers. To my knowledge the IRS does not report the details of the cost of the earned income tax credit to the public. All tax expenditures should be made public. Failure to do so, means that Congress and the President are deliberately trying to conceal how much it is spending. Congress, when raising the minimum wage, should be put on notice of how much it is likely to cost taxpayers.
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