Journal Issue: The Next Generation of Antipoverty Policies Volume 17 Number 2 Fall 2007
Gordon L. Berlin
Weighing Alternative Strategies for Reducing Poverty
Although the EITC, as now designed, has helped to ameliorate poverty in families with children, it still leaves behind many poor and near-poor families and individuals. Additional strategies for further reducing poverty include boosting the minimum wage, investing in education and training, and rethinking the generosity, targeting, and structure of the EITC.
Both experience and empirical evidence suggest that the minimum wage can play a valuable role in raising wages and reducing poverty without severely distorting labor markets. First passed in 1938 in response to the Great Depression, the minimum wage placed a floor under the wages of most workers and was pegged at about half the median hourly wage of nonsupervisory workers throughout the 1950s and 1960s. As of early 2007, its value had fallen to less than a third of the nonsupervisory wage, its lowest level in fifty years.41 Both President Bush and congressional leaders have vowed to increase the minimum wage to $7.25, although if its value is not indexed to inflation, it will once again gradually erode over time.
Why are political leaders reluctant to keep up the value of the minimum wage, a cornerstone of antipoverty policy since the Great Depression? There are two primary reasons. First, raising the cost of workers reduces the profits of employers, weakens their competitive position relative to global employers, and lowers the number of employees they can hire without raising prices. Second, only one in five minimum-wage workers lives in a family with below-poverty income. Most are between sixteen and twenty-four years old and do not support families, making the minimum wage a relatively inefficient way to reduce family poverty. However, Peter Edelman, Harry Holzer, and Paul Offner, summarizing empirical work by David Card, Alan Krueger, and others, conclude that increasing the minimum wage to $7 an hour would at most result in trivial job losses in the tight labor market expected as the baby boomers begin to retire.42 Moreover, they note that about four-fifths of the increase would accrue to people with incomes in the bottom 40 percent of the income distribution, partly as a result of upward ripple effects on nearby wages.43 Nonetheless, reluctance to raise the minimum wage or to adjust it for inflation and concerns about targeting inefficiencies make the minimum wage alone an unreliable vehicle for addressing poverty.
Given the steep rise in the return to higher education over the past twenty-five years— today a college graduate earns more than twice what a high school graduate earns (about $23,000 more, annually)—investing in the education and training of low-wage adults is an essential long-run alternative strategy for reducing poverty.44 And for workers who have the necessary basic skills to succeed in postsecondary education, community college is a particularly attractive and ubiquitous option. Community colleges enroll nearly half of all college students in the United States— more than 11 million nationwide. But nearly half of all students who begin at community colleges leave before they can receive a credential, including untold thousands of students who are relegated to developmental education classes and never make it to creditgranting courses.45 Although community colleges are actively experimenting with curricular reforms, student support services, and new forms of financial aid to address these problems, the fact remains that a large fraction of low-wage workers will not have the necessary skills to take a postsecondary route to higher earnings. And the K–12 reforms that are the subject of the article by Richard Murnane in this volume are at least a decade or two away from making a major difference in the skills of graduating seniors, who in any event constitute only a small fraction of the total workforce in any given year.
Other EITC Reforms
Over the next ten to twenty years, then, it is hard to imagine reducing poverty without finding a way to make low-wage work pay. A compelling body of evidence suggests that the earned income tax credit can be an effective way to supplement low earnings. Policymakers have three choices. They can increase the EITC for families with children, and especially for large families; increase it for married couples only; or supplement the earnings of individual low-wage workers, exempting the supplement from joint income tax filing requirements.
The first strategy moves more families with children above the poverty line but perpetuates current inequities by doing little to address the companion problems of single parenthood, the low earnings of single men and women, or marriage penalties in two-earner families. The second approach shares several of the shortcomings of the first and while it reduces marriage penalties for some, it creates new ones further up the income stream. It also asks people to marry for the money, running the risk of promoting any marriage over a healthy marriage, which has attendant risks for children and crosses a line that many find objectionable. Moreover, it fails to tackle the problem of the low wages of single adults, and places the burden on a single mother to calculate the value of a possible increase in benefits that would come with a potential marriage partner who at the moment may be underemployed and quite poor. That is asking a lot: to act on incentives, people have to understand them. Yet hardworking but still poor men would have no way of knowing— much less signaling—that their income would be 25 percent higher if they were married. That leaves the third option.