In a study published in the July issue of Industrial and Labor Relations Review, UCI economist David Neumark finds that a high minimum wage, when coupled with the Earned Income Tax Credit (EITC), increases employment and earnings among single mothers, especially those with very low family incomes. The findings are surprising, says Neumark, given that most of his work has focused on the adverse effects of minimum wages on low-skilled workers.

The study, co-authored with William Wascher, senior associate director of the Federal Reserve’s
Division of Research and Statistics, is based on Current Population Survey data from 1997-2007, with detailed information on state minimum wages and state EITCs.

 “The EITC provides supplemental income to low-income families with children, encouraging them to work,” Neumark says.  A large body of research – including his own– has shown that the EITC is effective in helping low-income families earn their way out of poverty because it delivers higher employment and earnings directly to low-income families. 

“When you add a high minimum wage to the mix, you enhance these positive distributional effects and induce some low income parents to work even more,” he says. 

The downside? 

“The combination of an EITC and a high minimum wage helps poor families, particularly female heads of households, by inducing them to work more,” he says.  But the evidence shows that combining an EITC with a high minimum wage reduces employment and earnings of less-skilled and minority individuals without children in the home, who get little or no direct benefit from the EITC.  “If you’re a low-skilled single person with no kids, this policy combination hurts you by bringing more women into the labor market who are now competing with you for the same jobs.” 

Whether the policy combination of a high EITC and a high minimum wage is viewed as favorable or unfavorable depends in part on whom policymakers are trying to help, Neumark says, adding that, in general, anti-poverty policy puts a priority on families with children.

For an abstract of the study, visit http://digitalcommons.ilr.cornell.edu/ilrreview/vol64/iss4/5/.  Full viewing requires UCI login or journal subscription.
 

 

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