Helping low-end workers: Minimum wage adjustment or income supplementation?

Public concerns about increasing inequality appear to be reaching the ears of legislators in North America and Europe. President Obama recently announced that he would adjust the minimum wage for federal contractors to just over $10 per hour, and called upon congressional and state legislators to do the same for wages in their jurisdictions. There is also a national movement which is building momentum in seeking the $10 per hour minimum wage, which would be a hike of almost $3 per hour in some states. Obama has also signalled that he wishes to enhance the Earned Income Tax Credit (EITC), especially the portion that applies to unattached workers.

In Canada, a parliamentary committee recommended that the federal government increase subsidies to low-income workers through the Working Income Tax Benefit (WITB).

In several Canadian cities there are groups pushing for the municipal governments to adopt “living wage” policies which would require businesses competing for contract work to pay their employees wages that meet a community standard. Ontario will raise the minimum wage to $11 per hour this spring, with some groups pushing for $14 per hour.

The Canadian Federation of Independent Business (CFIB) – according to John Shmuel of the Financial Post ( – recommends that low-wage workers be helped by means of an increase in the basic personal exemption, which is deducted from everyone’s taxable income. (Politudes: Seems that might help the rich more than the poor.)

The German government has recently announced that a minimum wage of €8.50 per hour will be introduced on January 1, 2015. France’s minimum wage is a bit more than that now, and France was one of the countries urging Germany to take action, while across the EU there is discussion of EU-wide minima to prevent “social dumping.”

The discussion and debate about the best policy options to use (higher minimum wages or income supplements for the working poor) illustrates the differential effects and purposes of the two approaches. The opinions of US academics seem to flow along the following streams:

1. Increasing the minimum wage across the board is seen as helping young people who are in part-time and full-time work, but who may or may not be in low-income households. Students and young adults still living with their parents are often mentioned. Opponents claim that it is not an efficient anti-poverty measure (and also, that minimum wage is a labour standard and not an anti-poverty measure).
2. The EITC of the USA and the combination of the WITB and Child Tax Benefit in Canada are targeted mainly on parents with children, especially on single custodial parents. Increasing the benefit for unattached adults would have a strong anti-poverty effect, but such an action would also expand the population eligible to receive it – because of the need to have the benefit decrease gradually with earnings in order not to have hidden disincentives to more hours of work.
3. The proponents of increasing the minimum wage tend to think that the tax credits are a means whereby taxpayers are indirectly subsidizing industries which cannot or will not pay respectable wages. Their argument could probably be extended to situations where families indirectly subsidize industry through supporting their young (students or other) who work at the low rates. Since the early 1990s, provincial governments have tried to ensure that the unattached adult has an incentive to work, by maintaining social assistance support available to them, at survival levels. Nonetheless, much growth in social assistance dependency has been noted in that population.
4. Businesses tend to suggest that mandated wage increases will lead to reduced work hours (rather than, for example, price increases). Some economists believe that price increases are likely, but the strength of the inflationary push is difficult to measure and may not be significant, especially when inflation in general is very weak.
5. Several analysts are suggesting a combination of wage increases and tax subsidies, both to force some increased productivity among low-wage employers, and to reverse the slide in market incomes among low-wage workers.

There is a good discussion of such issues at

among Gordon Berlin, Heidi Shierholz, Joseph Sabia and Harry Holzer, speaking in a forum organized by the American Enterprise Institute

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