Does a Higher Minimum Wage Enhance the Effectiveness of the Earned Income Tax Credit?

Abstract

The authors estimate the effects of the interactions between the Earned Income Tax Credit (EITC) and minimum wages on labor market outcomes. They use information on policy variation from the Department of Labor's Monthly Labor Review, reports published by the Center on Budget and Policy Priorities, and data on individuals and families from the Current Population Survey to assess the economic impact of minimum wages and the EITC on families. Their results indicate that for single women with children, the EITC boosts employment and earnings, and coupling the EITC with a higher minimum wage enhances this positive effect. Conversely, for less-skilled minority men and for women without children, employment and earnings are more adversely affected by the EITC when the minimum wage is higher. Turning from individuals to families, for very poor families with children a higher minimum wage increases the positive impact of the EITC on incomes, so that a higher minimum wage appears to enhance the effects of the EITC. Whether the policy combination of a high EITC and a high minimum wage is viewed as favorable or unfavorable depends in part on whom policymakers are trying to help.