Helping Working-Poor Families

Content

Two major policies relied upon during the 1990s for enhancing the incomes of working poor families were expansions of the Earned Income Tax Credit (EITC) and raising the minimum wage. Both approaches have shortcomings. The minimum wage inefficiently targets benefits to low-income families, in addition to inducing job losses among the less skilled and causing price increases on goods and services produced by low-wage labor that can be disproportionately paid for by poor families. While avoiding these deficiencies, the EITC creates sizable work disincentives for those wishing to move from part-time to full-time work. This consequence arises because the EITC takes away benefits in this range of hours offsetting increases in earnings. This results in a relatively high implicit tax rate on incremental work effort.

As Congress faces renewed debates over reforming welfare and assisting workers in a slowing economy, legislators have an opportunity to craft improved policies for helping working-poor families with children. In this study, Stanford University economists Thomas MaCurdy and Frank McIntyre develop two such proposals: a wage-based and a wage-subsidy modification of the existing federal EITC program. Their analysis demonstrates that both programs substantially mitigate the shortcomings of the current form of the federal EITC which bases benefits purely on annual family earnings. Moreover, both the wage-based and wage subsidy EITC programs match the minimum wage in enhancing work incentives, and wholly dominate it as an antipoverty policy.