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Financing

An alternative to the minimum wage

President Obama wants to see the minimum wage raised from $7.25, where it’s been for six years, to $9. There’s a better option for helping low-income earners that should be considered.

There are solid economic arguments for a minimum wage. A 2012 Organization for Economic Cooperation and Development report found an increase in the minimum wage dampens income inequality. There are a lot of folks who believe income inequality isn’t an issue, that to have a vibrant economy you have to have winners and you have to have losers. And that’s true. And with the success of Reaganomics it appeared the debate over income inequality was over: supply-side economics won. But a growing consensus is emerging that the extreme income inequality we now see in the country is a drag on the economy. I’m not going to rehash the argument here, but would point you to a great summary from National Journal last September1.

The argument for a minimum wage was also bolstered by a 2011 study by the Federal Reserve Bank of Chicago that found for every $1 increase in the minimum wage, spending by families with minimum wage workers increased by $800 per year. And as Evan Soltas pointed out in a recent piece for Bloomberg, studies have found little overall impact on employment from the minimum wage2. No question, though, that individual restaurants would feel the impact of a rise and that it could affect their ability to hire.

And so here’s the question: If a policy is meant to help the economy—and society—as a whole, how much of the burden should be carried by individual businesses and how much should be carried by everyone else? In the case of healthcare reform, for instance, restaurants are carrying a disproportionate share of the burden for something that benefits everybody. Should they do the same when it comes to correcting income inequality and creating livable wages?

Particularly in light of healthcare reform’s impact on our industry, I’d argue no. And the fact is, there is another policy tool that could not only better address livable incomes for the poor, but share the burden more equitably: the Earned Income Tax Credit.

Put simply, the EITC gives tax money back to poor families. You receive a certain amount depending on your level of poverty. Over 27 million taxpayers received nearly $62 billion in EITC last year. A major distinction from the minimum wage is that it targets poor families as opposed to low-skill workers (which can be teenagers in families who are not poor, for instance) and it places the burden on society as a whole.

But the more interesting distinction is in the effectiveness of the two approaches. A 2007 report by the Congressional Budget Office showed that the increase in the minimum wage to $7.25 (which passed that year) increased incomes by $11 billion. Of that, $1.6 billion went to poor families. An increase in the EITC that year of $2.4 billion, saw $1.4 billion go to the poor. If the goal is to help the poor, the EITC shows a much bigger bang for the buck.

It’s not perfect. The EITC comes in a lump sum, while need is a year-long thing. And it has an impact on the debt.

My argument here is not against the minimum wage. My argument is that if our goal is to help the poor and address income inequality as efficiently as possible, a minimum wage increase is not the best tool for the job. And considering the burden healthcare reform is already putting on restaurants, the timing couldn’t be worse.

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