Making work pay: Wage insurance for the working poor

In this Public Policy Brief, Barry Bluestone and Teresa Ghilarducci argue for the need to establish "wage insurance" in the current environment of stagnating wages, increasing income instability, and rising adult poverty. The War on Poverty has succeeded in reducing the poverty rate for elderly Americans from 30 percent to 10.5 percent over the past three decades. Non-elderly adults constitute an absolute majority (50.2 percent) of all poor persons in the nation, up from 40.1 percent twenty-five years ago. With the overall growth in the number of persons in poverty in the United States from 25.4 million in 1970 to 38.1 million in 1994, the number of poor non-elderly adults nearly doubled, from 10.4 million to 19.1 million. Bluestone and Ghilarducci note that essential components of a wage insurance system already exist in the earned income tax credit (EITC) and the minimum wage. But the EITC and the federal wage floor must be seen as complements to one another, not substitutes for one another, in order to meet important criteria for any insurance program: high target efficiency and minimal adverse behavioral effects. Properly used, the EITC and the minimum wage fit together like finely cut jigsaw puzzle pieces; the considerable strengths of the EITC offset weaknesses in the minimum wage, while the minimum wage's greatest benefits offset some of the shortcomings of the EITC. The authors show that low income is being "democratized" as job instability increases. Due in part to corporate downsizing, an increasing number of once secure working-class and middle-class families are experiencing temporary or periodic poverty. Falling wages for at least the bottom 20 percent of the workforce and rising job and wage instability for much of the middle class portend a society in which work no longer serves as an effective guarantee against privation. Institutionalizing a form of wage insurance based on the EITC and a rising minimum wage can help protect a large segment of workers in this economic environment. The modest minimum wage increase to $5.15 recently passed by Congress will raise the income of over 12 million workers who now earn from $4.25 up to $5.15 per hour. Moreover, findings suggest that nearly 9 million workers currently earning between $5.15 and $6.14 per hour will see their wages rise by an average of 10 percent when the $5.15 wage floor goes into effect. This means that more than 21 million workers--one out of six in the workforce--will see their wages improve as a result of enacting the higher minimum wage. The EITC's greatest asset, from the perspective of battling poverty, is its target efficiency. More than 46 percent of the total tax credit goes to families who are living under the official poverty line, and more than two-thirds of the credit goes to families with income under $20,000. The EITC has still another advantage, one that is often overlooked by both its supporters and its detractors. It is a form of wage insurance for the temporary poor in a time of job instability and earnings insecurity. In any one year about one in six families is eligible for the tax credit, and over a period of a decade nearly 40 percent of families will have a year or more in which their wage income declines sufficiently for them to be eligible for the EITC. Neither the minimum wage nor the EITC is by itself an ideal solution to the wage poverty problem. Yet when the two are combined, the sum is greater than its parts. On three criteria (income adequacy, target efficiency, and labor supply employment effects), the minimum wage is weak. These are precisely the strengths of the EITC. On four other criteria (labor demand, productivity enhancement, fiscal impact, and limited moral hazard), the minimum wage is clearly the preferred program. What makes the two fit together so well is that the existence of a higher minimum wage actually reduces the negative productivity, fiscal impact, and moral hazard effects of the EITC, while the EITC makes up for the weak target efficiency and income adequacy of the minimum wage. Bluestone and Ghilarducci argue for a comprehensive and coherent strategy aimed at the working poor and those susceptible to highly fluctuating incomes. Changes in the food stamp program enacted as part of the recent welfare reform legislation and proposed cuts in the EITC work in precisely the opposite direction. A cut of $23 billion in food stamp benefits between 1997 and 2002 and the increased FICA tax liability accompanying the increase in the federal minimum wage reduce the effective hike in the wage floor from $0.90 to $0.73 per hour for non-immigrants. For legal immigrants working full-time, who will now be denied food stamps, the lost benefit is more than double the earnings gain attributable to the increase in the minimum wage. In addition, the congressional resolution for balancing the federal budget by 2002 includes an $18.5 billion reduction in EITC benefits. These changes undermine the objective of assuring that families that work will not be mired in poverty and dependency. Wage insurance becomes more necessary in a political climate of welfare overhauling and budget cutting that gives with one hand while taking with the other. Efforts to improve education and training programs, expand community development efforts, promote unionization, and narrow the gender pay gap can reduce the long-run cost of wage insurance.