The Bare Minimum

March 8, 2007

This op-ed appeared March 8 in The New York Times.

By: Sarah Hamersma
Sarah Hamersma is an assistant professor of economics at the Warrington College of Business Administration at the University of Florida.

BOTH the House of Representatives and the Senate have recently passed bills raising the minimum wage. The Senate bill includes tax breaks for businesses, based on the following logic: While a minimum wage increase is popular, the resulting higher labor costs will translate into fewer jobs, more expensive products or both. The solution, the senators concluded, was to subsidize companies that hire disadvantaged workers, in order to reimburse them for these higher wage costs.

Does this reasoning hold up? A look at one of the key pieces of this business tax package — the Work Opportunity Tax Credit, which has been in place since 1996 and would be extended for five years under the proposal — suggests otherwise.

First, most eligible companies don’t take the credit, which averages about $1,000 for each employee who belongs to one of the specified categories of workers (for instance, recent recipients of welfare or food stamps). Even though national surveys show many such workers being hired, employers claim the credit for less than a third of them.

Second, there is no evidence that employers have hired more eligible workers as a result of the program. Indeed, according to a number of studies — including one by the Department of Labor, another surveying 101 temporary help agencies, and a statistical analysis of welfare recipients in Wisconsin — the credit seldom influences hiring decisions of participating firms. Many companies wish to avoid preferential hiring, even though the policy is explicitly intended to give disadvantaged job seekers an advantage in the labor market.

Is it a good idea to extend this program, even though it hasn’t meaningfully improved the employment picture for disadvantaged workers? But suppose such a program had even a small effect. Would it undo the negative consequences of a minimum wage increase? The answer is no, for two reasons.

First, data from Wisconsin show that fewer than 25 percent of workers claimed under the credit are earning the minimum wage. Second, large corporations are the most active participants in the program. In 1999, the average participating corporation received more than $100,000 in credits. The Senate bill, however, is supposed to support small businesses, which have never taken advantage of the Work Opportunity Tax Credit in large numbers, but are the most likely to suffer under the proposed minimum wage increase.

There’s a more direct path to improving incomes for the working poor. Instead of requiring employers to pay more, and then allowing them to apply for reimbursement through tax subsidies, why not skip the middleman and subsidize the worker directly?

Such a program already exists. The Earned Income Tax Credit is a federal tax refund for workers, who qualify based on family income rather than individual income or wages. This means that an upper-class teenager working at McDonald’s will not get a benefit, but someone trying to support a family will. Over the last 15 years, the credit’s subsidy rates have increased and the definition of eligibility has broadened. These expansions have greatly improved labor force participation among single mothers.

If we don’t think that people with low incomes are getting what they need, let’s not look to ineffective employer tax credits to try to create jobs. And let’s not burden employers with the costs of a higher minimum wage, most of which won’t even go to low-income families. If additional investments are to be effective — and directed toward the intended recipients — they should focus instead on making sure our Earned Income Tax Credit program provides an adequate income supplement for the working poor.