There has been a renewed interest in raising the federal minimum wage in the US, with some members of Congress calling for an increase to $15 an hour. Some opponents to the minimum wage suggest that the Earned Income Tax Credit (EITC) is a better policy. This question explores the EITC.
Low-wage workers receive additional income from the federal government depending on how much they earned and how many children they have. Consider an individual with one child:
there is no credit if nothing was earned.
the credit equalled $.34 per dollar earned and peaked at around $3050, when the worker earned $8950.
it remained at $3050 until the worker earned around $16450
it was phased out gradually, by $.16 per dollar earned, until eliminated completely if the worker earned $35525 or more per year.
Graph the budget constraint for this individual assuming there are no other taxes, and they earn "W" dollars per hour.
Answers
As Congress debates the specifics of yet another stimulus bill, President Joe Biden and Sen. Bernie Sanders continue to push for the inclusion a $15 federal minimum wage – a policy that is only likely to prolong pandemic pain for America’s most vulnerable businesses and workers.
As if to confirm such fears, large corporations like Amazon and Walmart have been quick to voice their support for the increase. “It’s time to raise the federal minimum wage,” writes Amazon’s Jay Carney, boasting of their decision to increase wages in 2018. “We believe $15 an hour is the minimum anyone in the U.S. should be paid for an hour of labor. We also believe it’s good for business.”
But while it may be “good for business” for Amazon, such an increase will pose significant challenges for others, particularly smaller businesses and those operating in low-cost states. According to one study, “Roughly half the minimum-wage workforce is employed at businesses with fewer than 100 employees, and 40% are at very small businesses with fewer than 50 employees.”
According to the latest analysis from the Congressional Budget Office, the proposed Raise the Wage Act would eliminate an estimated 1.4 million jobs while increasing the federal deficit by $54 billion over the next 10 years. This doesn’t even account for the indirect ways such a policy is likely to drive automation, squeeze consumers with higher prices, and reduce gross domestic product.