Income with and without the EITCIt’s worse. But I’m getting ahead of the story.

Faithful reader and economics enthusiast Brian K. recently posted an article from the NYT from economics professor David Neumark explaining that the minimum wage situation isn’t as dire as it seems. He asserts the Earned Income Tax Credit (EITC) helps offset most of the losses to minimum wage in constant dollars.

The professor’s math holds, and in fairness, I was unaware of how much of an advantage the EITC is to low income families. This does take a lot of the wind out of the oft-touted argument that in inflation-adjusted dollars, the minimum wage has declined dramatically over the last several decades.

But the story isn’t quite done there. First, the EITC does very little for families without kids. Granted, families without kids have lower expenses, but an apples-to-apples comparison of childless adults across the decades still shows a substantial decline income across those same 25 years.

Still, let’s focus on Professor Neumark’s standard family of 4. Further, let’s compare that family’s minimum wage income against the U.S. Census Bureau’s Poverty Threshold. And let me preemptively concede that this poverty threshold is an imperfect measure of whether or not a family is “poor”, but whatever its imperfections, it should be consistently imperfect across the years such that it can be useful in a historical comparison. Further, while food stamps and other non-cash subsidies are not included in these thresholds, tax burdens/credits (including the EITC) are in there.

The table below calculates the number of full-time minimum-wage jobs required for a family of 4 to hit the poverty threshold in both 1976 and in 2012.

Year Min Wage Hrs/Yr Annual Wages Poverty Threshold Jobs Required
1976  $         2.30 2000  $         4,600.00  $                   5,815.00 1.26
2012  $         7.25 2000  $       14,500.00  $                23,492.00 1.62

The results show that since 1976, almost an extra half of a job is required just to his this meager threshold. That’s a 28% labor increase required just to achieve the same standard of living.  So while Nuemark’s assertion that real wages have remained flat when adjusted for inflation and taxes may be accurate, it does not take into account that the actual cost of getting by has climbed faster than inflation.

Let’s look at the current “family of 4” situation a bit differently. Harlingen, Texas is consistently deemed the cheapest place in the country to live. If minimum wage constitutes a living wage anywhere, it should be there. However, MIT’s living wage calculator for the Harlingen area estimates that our family of 4 needs a gross income (before taxes, including the EITC) of $36,088 to make ends meet. This calculator assumes minimal costs for food, housing, medical, and transportation needs. It further assumes there are no child care expenses, meaning the parents’ work schedules have to be opposite enough for that to work. And it provides a meager $176/month for “other” expenses outside the 4 basic categories. This expense model hardly qualifies as living comfortably, and yet it requires 2.5 minimum-wage jobs to achieve this standard of living.

That 2.5 job requirement may be partially offset by SNAP (Food Stamps) and other subsidy programs, but considering there’s no child support in the mix, and that runs about $700/month for two kids I would argue that subsidies might at best balance out the missing child support.

So hopefully we can now agree that getting by on your own while working a minimum wage job sucks a lot more now than it used to. And while trying to raise a small family on minimum wage jobs has not seen a commensurate increase in suckage over time, it still draws a mighty vacuum.

The plight of the working poor is a lot like the climate change issue. You can choose to ignore it or claim it doesn’t exist, but it’s going to continue to grow and eventually bite you in the ass whether you believe in it or not.

5 thoughts on “Being Poor Ain’t What It Used to Be

  1. This line of thought has opened up so many tangents that I want to touch on, that I’m not sure where to start. I’ll just start typing and see where we wind up. First of all, you don’t know your safety net if you think people working for minimum wage pay $700 for childcare.

    http://www.dpw.state.pa.us/forchildren/childcareearlylearning/childcareworkssubsidizedchildcareprogram/

    http://otda.ny.gov/workingfamilies/ccs.asp

    Secondly, I truly don’t understand the MIT living wage calculator, how the required income before taxes is $32208 and they figure $3880 for taxes. Using this:
    http://www.tax-brackets.org/federaltaxtable

    I figured about $120 for income taxes. Property taxes? Social Security? I don’t know where they get that number. I know if you make $29,000 and add $4065 for EIC you are above their living wage, and well above their poverty wage.

    I won’t stipulate that the poverty level has been consistently poor across the years. My guess is that it probably has gotten worse over the years, but I really don’t know enough to say.

    I think your family of four with 2 minimum wage jobs have a place to live, (probably small), a used car, cell phones, cable, internet. I think they get enough to eat and they probably have a few beers (Milwaukee’s Best) on the weekend. Not the best life for sure, but not the worst. Hopefully, they have a chance to move up and make their life easier before long.

    But do we really want to set policy based on this? Why don’t we raise minimum wage to $25 an hour. How about $50? Can we both agree that at some point raising the minimum wage has a negative effect on jobs? It’s Eco 101, even in Krugman’s textbook. So we have a better tool for getting money to poor people, the EIC. Let’s use it. Let’s not villainize the people who create the jobs.

    Can we both agree that the poor become less of a issue when the economy is booming? We should be working at creating incentives for businesses to create jobs, instead of creating disincentives.

    Can we both agree that the person with the single greatest effect on that person’s income level is that person? We should have a system where always and everywhere you get rewarded when you work more or harder or smarter. Instead we have a morass at the lower income levels where the marginal incentive to work is nothing at times.

    So feel free to advocate against the plight of the poor, whatever that is, but please try to do things that will help them instead of things that get their vote.

  2. My thinking on this is continuing to evolve. I do admit that I don’t know my safety nets. There appears to be a Byzantine web of them out there, which not only has to be inefficient, but begs the question of how many people that truly need those programs have access to, or are even aware of them. I’m sure some are masters at exploiting them, but would be surprised if that’s the rule rather than the exception.

    As to the MIT model, I can’t quite explain the tax number either. The FICA/Medicare taxes would be $3600, and adding in the small income tax owed, it seems the EITC would offset that so it was close to a wash.

    But I think the point that’s beginning to resonate with me is something we may agree on. Namely, that two parents, without the aid of government safety nets, are unable to support a small family working two full-time jobs. The upshot is that government is essentially subsidizing low-wage employers.

    On the one hand, I get that employers should be free to play the market and get labor as cheap as they can. But I don’t get why that should push a burden onto everyone else.

    As a society, I get that we choose to support the disabled, the young, the old, and others who are truly unable to work. But I don’t get that we should be essentially supplementing the pay of Wal-Mart greeters and burger-flippers. Yes, this program keeps the price of Big Macs low, but shouldn’t the champions of free market economics be outraged by that?

    Now one option is simply letting the market sort it out. Let the working poor starve on low wages and no safety net. I suppose that could create an incentive to not work, which could decrease the labor pool, which could eventually force employers up to a living wage. But that will be a painful and even cruel transition.The alternative seems to be to just require a sane minimum wage.

    And I’m sorry, but the argument of, “Why not make the minimum wage $100/hr” is just silly. No one is advocating for any sort of idealized communist reallocation of wealth.

    I don’t want minimum wage workers to be well off. I don’t want to remove incentives for them to get better jobs. But I do want to get them off of government support. It would simplify their lives; it would simplify government bureaucracy; and it would make companies pay for the total cost of the labor they are using. And I can’t understand why this isn’t consistent with conservative orthodoxy.

  3. In an effort to maybe take the wind out of my own sails, here’s an interview with Nobel-winner Edmund Phelps on his plan to help low-wage workers without raising the minimum wage.

    He’s pushing an idea of subsidizing companies directly (rather than employees) as an incentive to hire low-wage workers. The theory is that companies would quickly bid up the wages of low end employees to compete for the subsidies.

    While i get the principle, it seems like there’s more than a little devil in the details of getting such a plan to work. But then, there’s probably a reason he has a Nobel prize and I don’t.

    Anyway, more food for thought. But it is pertinent that his solution is not to cut subsidies and eliminate the minimum wage.

  4. Isn’t somewhat appropriate that the safety net is made out of a web? Anyway, I wouldn’t go as far as saying that our minimum wage family of four can’t survive without assistance. I recognize it would be difficult, but I think you could live cheaper than the living wage allows. I don’t think my family spends $713 (2adults 2 children) a month on food. There seems to be a big gap between the poverty wage and the living wage. Not sure what you would call the in between wage. Also, I’d like to point out that next year this family will get medicaid coverage. Although this was in no way due to anything the Republicans did, it is well known that it is happening and a point against your argument that they aren’t doing more for the poor. They would say they don’t have to do more because the poor are already going to get more.
    The point about raising minimum wage to $25 or $50 or $100 is that most people have an innate sense that doing so would really screw things up. Most people think there is a level that raising the min wage to is bad, they just disagree what that level is. Maybe the minimum wage is like medicine, a small dose will cure you and a big dose will kill you, but who is qualified to make that prescription? Politicians?
    I can’t speak for conservatives, but I consider myself a free market proponent, so I will tell you why I like EIC. I believe in the free market because I think it is the most democratic and fair economic system that you can have. People vote with their dollar. The market responds to the consumer’s wants and needs. It tends to eliminate inefficiencies. It is not perfect, but better than any alternative. It is also somewhat of a natural state of affairs that any economy will tend toward. Hence, the black market in Soviet Russia. When the government interferes with it, there are always unintended consequences. The consequences of minimum wage would be higher unemployment and higher prices. This is, of course, to help the worker make a decent living, or to get off government assistance. It is highly questionable whether minimum wage actually helps out the working poor. Results of studies are mixed. I think it’s better to let the market take its course and then give aid to the people who need it. We are rewarding people for working. The incentive is in the right place. There are fewer unintended beneficiaries. I think if everybody worked, you would have much less opposition to helping the needy. I have heard other ideas like making companies like Walmart reimburse the government for the aid given to their employees. I’d go for that much sooner than raising the minimum wage, but I still wouldn’t be a fan. I’m sure that there would be unintended consequences to that. Even more though, I don’t think that Wal Mart is doing anything wrong. They employ millions of people. They sell cheap goods. I don’t believe Wal Mart has an obligation to live up to someone’s idea of a social contract. Legislating a social contract would be a slippery slope to climb.
    I haven’t read the Phelps article yet. It sounds interesting, but I agree the implementation would be tough. I need to have a beer and try to think through the unintended consequences.

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