Living Wage and Earned Income Tax Credit: A Comparative Analysis

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Living wage ordinances have spread rapidly since 1994 when Baltimore opened the modern era of high-wage mandates. As of June 2002, 82 cities had adopted a living wage law in some form. However, the efficiency of these laws is still under scrutiny. If the main goal is to provide additional income to families, are living wage laws the best means to reach that goal? This new research from Dr. Mark Turner (Georgetown University) and Dr. Burt Barnow (Johns Hopkins University) shows that living wage laws are vastly inefficient when compared to localized Earned Income Tax Credit (EITC) programs.

Family Income or Wage Thresholds?
The central question for lawmakers to consider is whether their anti-poverty policies target low-income families or simply cover workers who happen to hold low-wage jobs. This research provides strong evidence that a local EITC targets low-income families, while the living wage approach merely affects low-wage workers regardless of their family income.

The authors compare two types of living wages. One is a broad-based living wage that samples a wide variety of industries and occupations that might be covered by laws with difficult-to-define boundaries. The other type of living wage in this study is the narrowly focused living wage, where specific occupations and industries are known targets of legislation.

The researchers show that both programs are inferior to the EITC at targeting poor and low-income families. A local EITC is far better targeted, focusing the same amount of money on families with children (the authors focus on the two child family), with eligibility matching the federal EITC guidelines for family size.1 However, benefits phase-in and phase-out rates do not match the federal program, but are scaled to local benefit levels.

Do Poor Families Qualify?
Less than one percent of the poorest working families in major cities without living wages are eligible for benefits under a narrowly targeted living wage.2 Broad-based living wages would benefit just 39 percent of the poorest working families—defined as those with incomes below 60% of the poverty level. Comparatively, 92 percent of the poorest working families meet the EITC eligibility requirements, suggesting that the EITC is a far better targeted program.

Using the fact that eligibility for the federal EITC is phased out at annual incomes of about $32,000, this can be used as a good proxy to see how well living wage programs are targeted to low-income working families. The authors suggest that localities could adopt their own EITC programs that mimic or piggyback the federal program, with distribution based on federal benefits and eligibility determined by the tax code. A local EITC that piggybacks on its federal counterpart has the same eligibility rules, so we can compare it to the eligibility for different living wage programs.

When grouping all 58 million working families of the sample regardless of income status, only 0.013 percent of this group benefits from a narrow living wage ordinance, while 16 percent are eligible for the EITC. When the group is restricted to those affected by a narrow living wage, fewer than 30 percent are found to be eligible for the EITC. Even under a broadly focused living wage, where approximately 22 percent of all families are affected, only 30 percent of those families are deemed eligible for the simulated EITC.

Are Eligible Families in Poverty?
Viewed another way, only 12 percent of families affected by a broad living wage are below the poverty level, while only 26 percent of those affected by a narrow living wage are officially in poverty. However, 44 percent of EITC eligible families are below the poverty level. If we are most concerned with helping poor families, EITC programs are shown to be far more efficient in reaching this group.

Either type of living wage, whether broad or narrow, affects a large number of families that are not even “near poverty.” Over seven in ten working families benefiting from living wages have family incomes over 1½ times the poverty level, while only 13 percent of EITC eligible families fall into this category.

In fact, most working families affected by narrow and broad living wages are not even classified as “low-income.” Between 42 and 64 percent of living wage eligible families have incomes above the 20th percentile. Also, between 13 and 25 percent of living wage eligible families have incomes above the 40th percentile, a very large proportion for a program that is supposed to be directed at the poorest working families. By contrast, 99 percent of families who are eligible for the EITC have incomes below the 20th percentile, and 100 percent have incomes below the 40th percentile.

Helping Low-Income Families
This study is the first to examine this question in depth. The results of this study should vault the concept of a local EITC into debates in every municipal entity now considering a living wage. A local EITC is as yet a new phenomenon. Local lawmakers heretofore have been presented with living wage proposals as a “one-size-fits-all” approach to addressing poverty. A local EITC, however, is a viable alternative that promises much greater impact. And it has been done before. In 1999, Montgomery County, Maryland passed the nation’s first local EITC over a typical living wage. Supporters on the city council cited the fact that the intention of a localized EITC was to help families in poverty while not causing a budget increase similar to those that have been cited in many living wage budget studies.

Beyond target efficiency, past research has raised a number of questions about the labor market effects of living wage laws. With limited resources available, local legislators and voters should take notice of the superior efficiency of local EITC programs and work to create laws aimed at helping low-income working families, not just low-wage workers.