Low-wage workers need a boost. In the last few years, their wages have fallen sharply and now are no different than they were 40 years ago, adjusted for inflation (see chart), leaving millions struggling to afford basics like decent housing in safe neighborhoods, nutritious food, reliable transportation, and quality child care. As we detail in a new paper, states can use two effective policy tools to help working families and individuals meet their basic needs and pursue a path to financial stability: state earned income tax credits (EITCs) and minimum wages. The two work best when states strengthen them at the same time.
State EITCs and minimum wages help make work pay for families who earn low wages. They increase income, widen the path out of poverty, and reduce income inequality. They also help to build a stronger future economy because lifting family income for young, low-income children can result in improved learning and educational attainment and higher future earnings in adulthood.
While each policy is effective in its own right, state EITCs and minimum wages build upon each other’s effectiveness in boosting the prospects of low-wage working families. State policymakers should improve them in tandem. Here’s why:
State minimum wages and EITCs reach overlapping but different populations. State EITCs primarily target low-income families with children and are available to working families earning more than three times a full-time minimum wage worker’s annual salary of $14,500. The minimum wage goes to the very lowest-wage workers, regardless of factors like family income, family status, or age.
Increasing both at the same time provides added support to the working families who need it most. Together, a minimum wage boost and a robust state EITC can move families beyond poverty and further down the road to economic security. Also, a minimum wage increase provides the added benefit of increasing the EITC for some families.
The benefits of the two policies are timed differently. An expanded minimum wage increases every paycheck, which helps with routine expenses, like food, monthly bills, and rent. State EITCs are paid at tax time and can be used for larger, one-time expenses, like car repairs or a security deposit.
Improving both together allows the public and private sectors to share the cost of boosting incomes for those who work. The EITC is a cost largely borne by state government, and by extension state taxpayers. The state minimum wage is borne principally by the private sector, especially employers and consumers. Improving both policies spreads the cost of making work pay more broadly than does either policy alone.
Many states have increased their minimum wage and a few states have enacted EITC improvements in 2014. Three states — Maryland, Minnesota, and Rhode Island — and the District of Columbia have done both. Other states also should look to advance the two policies at the same time to make the biggest impact for families most in need.
Click here to read the full paper.