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Wednesday, February 15, 2012

I Support a Minimum Income, but Oppose a Living Wage

On Thursday February 16th a forum will be held at St. Mary's College to discuss whether the staff at the college should be paid a living wage. According to material distributed by organizers of the forum, some staff at St. Mary's earn as little as $24,500 per year while the annual cost of living in St. Mary's County is $34,000. Many of the staff employed by the college are single parents.

I sympathize with the motives of the living wage proponents, unfortunately I cannot support them in their effort because it would harm the very folks it's meant to help and would do nothing to address the growing problem of income inequality in America. I hope this forum provides an opportunity to discuss alternate, and I think better, ways to raise the standard of living of working folks and address the problem of inequality.

To elevate the salary of someone earning $24,500 to the living wage of $34,000 would require nearly $10,500 when factoring in the College's share of Social Security and Medicare taxes. In the end, to raise the salary of two staff members would require an amount nearly equal to the salary of one staff member in the absence of a living wage. Assuming the state refuses to provide sufficient funds to pay for the raises required by a living wage (a reasonable assumption) the only way to fund the pay increases would be to reduce the number of staff.  So for each two staff members who receive a pay increase, one staff member would receive a pink slip.

Economist David Neumark studied the effect of living wages after Baltimore City instituted such a policy in 1994 for workers paid through publicly supported funds. Neumark found forcing up wages causes demand for labor to fall. In his study he determined workers covered by the living wage law typically see a 3.5 percent increase in wages, but there was a 7 percent increase in unemployment among low-wage workers.

The living wage essentially creates an income transfer between low income people. In this case, two people see their standard of living rise at the expense of another person's job. Living wages are a poor means by which to increase living standards and do virtually nothing to deal with inequality. Worse, a living wage is a blunt instrument that does nothing to address actual need. A living wage would provide the same income to a working single parent with children as it would to a 17 year old dependent living at home.

But there is a better approach. The earned income tax credit (EITC) is a refundable tax credit offered by the federal government and the state of Maryland. The EITC offers low income workers additional income, and because it is linked to family size, earnings, investment income, and other measures it is based on need. The 17 year old living home with Mom and Dad would not qualify, but a single parent would, and the amount of the credit would reflect such crucial matters as the number of dependent children in the family.

Under current tax law, a single parent with one child earning $24,500 would qualify for approximately $2,000 through the federal EITC (the amount is larger as income declines). In Maryland, the typical EITC amount is roughly half the federal amount - in this case $1,000.  So the staff member earning $24,500 in 2011 would actually receive $27,500.

But there's more. There is also the federal child tax credit (CTC) of $1,000 per child. The tax credit is used first to reduce your federal tax bill, but for low income parents if the amount of the credit exceeds the total taxes due the parent can receive the difference in a refund via the additional child tax credit (ACTC) - this could mean an addition $1,000 for a family with one child.

Perhaps more important, because the EITC and the ACTC are distributed via taxes they transfers income from those who pay income taxes to those whose incomes are so low that they do not - it redistributes wealth from those who have to those who have not. No employer needs to worry about firing one employee in order to increase the pay of two others. And living wage movements that target only specific employers distract from the larger and more important goal of reducing inequality in society.

If folks really want to address income inequality the better approach is to lobby the state to increase the EITC and ACTC for low income earners. If you believe in the basic premise of "from each according to his ability, to each according to his needs" then the living wage is not the way to go. It removes from society the burden of responsibility to see to it that those who work are able to provide for their families. Only through a collective mechanism such as the tax code and the EITC and the ACTC can we address the issues of income inequality and ensure that we are not increasing the burden on the very folks we seek to help.