Earnings, EITC, and Employment Responses to a $15 Minimum Wage: Will Low-Income Workers Be Better Off?

Abstract

The District of Columbia will increase its minimum wage to $15 per hour in 2020. The city also provides a local refundable earned income tax credit (EITC) equal to 40% of the federal EITC. Using a computable general equilibrium model, the authors estimate the economic impact of the $15 wage policy. They also use a tax policy microsimulation model to estimate how the city’s EITC interacts with a higher minimum wage. Overall, the authors find that the higher minimum wage will produce significant income gains for most of the city’s low-wage workers, with relatively few job losses. Additionally, they forecast that most city EITC recipients will receive a lower EITC, but higher earnings more than offset the reduced tax credit. The model predicts that this policy change would largely be funded by higher consumer prices, lower firm profits, and higher business productivity. These predictions are subject to important caveats, including a local labor market that is likely inadequately characterized in a model assuming perfect competition. Economic policy makers should therefore use such modeling approaches as a powerful but ultimately imperfect tool.