Christy Romer, writing in the New York Times, deems the Earned Income Tax Credit a more palatable alternative to the minimum wage. So do I. (So, I feel confident, do the great majority of economists). But there is almost no overlap between Romer’s reasons and mine. I believe her reasons are wrong.
First, Romer observes (correctly) that while the minimum wage tends to reduce employment (though perhaps not by very much), the EITC has the opposite effect. That’s because the minimum wage is essentially a tax on hiring unskilled labor, while the EITC is a subsidy. When you tax something you get less of it; when you subsidize something, you get more.
But, contra Romer, that’s no reason to prefer the EITC. Since when, after all, is it automatically better to have too much of something than too little? Underemployment and overemployment are both bad things. Indeed, if the minimum wage (for whatever reason) has very little effect on employment while the EITC increases it substantially past the efficient level, that’s a good reason to prefer the minimum wage.
When we teach elementary economics — and by “We”, I mean pretty much everyone who ever teaches this course, surely including Christy Romer if she ever does — we teach our students how to illustrate the deadweight losses from both a tax and a subsidy. Anyone who’s ever seen those pictures knows that there’s no a priori expectation that one is worse than the other.
Romer’s other mistake comes when she compares the redistributive effects of the two policies — and ignores much more than half the story. She worries about who gets the benefits from each policy without pausing to ask who pays the costs — which is where the really big differences lie. The cost of the minimum wage falls, in the short run, on the owners of businesses that employ unskilled labor, and in the long run on the customers of those businesses. The costs of the EITC fall on taxpayers generally. Minimum wage supporters often talk about why it’s desirable to help the poor, but they rarely explain why it’s desirable to make big transfers away from the sort of people who eat at McDonald’s in order to spare the sort of people who eat at Per Se.
This is not, then, an argument for increasing the EITC — but it is an argument for preferring an EITC increase to a minimum wage increase, and a sufficiently compelling argument, I think, that it ought to knock the minimum wage right out of contention. How odd, then, that Christy Romer, while trying to argue that the EITC beats the minimum wage, ignores this argument completely.
