Doing More Than the Minimum
This year, Democrats and Republicans in the Massachusetts Legislature and in the governor’s office have united around a plan to increase the state minimum wage above the current level of $5.25 an hour. State leaders are considering whether businesses in Massachusetts will have to pay a minimum of $6.15 an hour (the governor’s proposal), or even $6.75 an hour (under a bill passed by the Senate early this year). The federal minimum wage is now set at $5.15 an hour, so Massachusetts is already a half-step ahead. Is it time for a much bigger step?
What other proposals might policy-makers consider to help more families boost their real income position and to narrow the growing income disparities among the state’s families? Here are our suggestions. For maximum effect, a variety of public policy efforts should be undertaken simultaneously.
- The federal Earned Income Tax Credit (EITC) should be altered to adjust for differences in the cost of living across states. The relatively low annual earnings thresholds at which the federal EITC currently reaches its maximum payment level mean that many families in high cost of living states like Massachusetts are unable to take full advantage of the federal tax credit. National studies on who takes the tax credit reveal that families in low cost of living states–especially in the South–are more likely to be eligible for the credit and get much higher EITC payments than their counterparts in high cost of living states in the Northeast. Because the federal EITC program doesn’t take cost of living differences among states into consideration, families with equally low living standards are treated differently depending on their place of residence. The Massachusetts congressional delegation should push to index the federal EITC to the cost of living of individual states to account for large geographic differences in living costs, especially for housing.
- The state recently implemented an add-on to the federal EITC program that provides a modest supplement (10 percent) to those eligible for the federal benefit. Instead of simply providing a piggyback on the existing federal program, the state EITC should be used to extend eligibility for EITC payments to families that have higher family earnings than those presently allowed under the federal statute. Currently, the peak EITC payment for a family of three (one child) occurs at $12,000 per year. After this point, the combined federal and state marginal tax rate for those who are EITC eligible rises rapidly. At $19,000 per year, a family of four (two children) faces a 50 percent combined marginal tax rate (federal income tax, EITC credit losses, social security payroll taxes, and state income taxes). The adverse work incentives of EITC at this point can diminish labor supply. Piggy-backing the state EITC onto the federal program also has the perverse effect of raising even higher the marginal tax rates for those families who earn more than $12,000 per year. Extending the state EITC to a broader array of families will moderately reduce the high marginal tax rates faced by low wage earners while helping more working- and lower-middle-class families at the same time.
- The state should consider implementing a set of wage subsidies for welfare recipients and other low-wage adults as they make the transition into the work force. These wage subsidies should be provided to mothers and fathers who have either been on welfare or have exhausted all unemployment benefits and are entering the labor market in jobs with hourly pay less than 200 percent of the federal minimum wage, with an hourly subsidy equal to half of the difference between their hourly wage and $10 per hour. Such a subsidy would provide stronger incentives for welfare recipients to become employed and work additional hours over the year in order to raise family income. Recent experiments in Canada with such a subsidy program have revealed substantive gains in full- time work and in the disposable incomes of participants.
- In the long run, the real wages received by the state’s workers will be determined by their productivity. One way to raise the earnings of workers is to boost their productivity through education and training, both on and off the job, including informal as well as formal training. Economically disadvantaged workers and welfare recipients who have completed JTPA job-training courses in Massachusetts have obtained median hourly wages of $8.50 per hour. Virtually no employed graduate has obtained hourly earnings below $6.25. Moreover, as the length of training increases – and higher-level job-specific skills are acquired – the wage rates of graduates rise as well.
- The state’s new Work Force Development Fund is designed to upgrade the skills and wages of employed workers, and we believe that funds should be primarily targeted upon low-wage workers (under $20,000 per year) in firms that have a need for a more skilled work force. This program should be focused on upgrading the skills of incumbent workers for jobs that require an associate’s degree or less – rather than on college labor market occupations. Such a program would yield a more equitable distribution of training opportunities and earnings and could boost the training capacities of small businesses in the Commonwealth.
Paul E. Harrington is associate director and Andrew M. Sum is director of the Center for Labor Market Studies at Northeastern University. They are co-authors of The Road Ahead: Emerging Threats to Workers, Families, and the Massachusetts Economy, recently published by the Massachusetts Institute for a New Commonwealth.