Public policies for the working poor: The earned income tax credit versus minimum wage legislation

Abstract

This paper documents the declining relationship between low hourly wages and low household income over the last half-century and how this has reduced the share of minimum wage workers who live in poor households. It then compares recent and prospective increases in the earned income tax credit (EITC) and the minimum wage as methods of increasing the labor earnings of poor workers. Data from the Current Population Survey (CPS) are used to simulate the effects of both programs. Increases in the EITC between 1989 and 1992 delivered a much larger proportion of a given dollar of benefits to the poor than did increases in the minimum wage from $3.35 to$4.25. Scheduled increases in the EITC through 1996 will also do far more for the working poor than raising the minimum wage.