Essential to any overall strategy of reducing poverty are policies that will increase the number and availability of jobs that can support a family above the poverty line. As economist Bradley Schiller notes, “Jobs—in abundance and of good quality—are the most needed and most permanent solution to the poverty problem.” What can be done to address the problems of jobs that do not pay enough to support a family, and not enough jobs in the first place? Several initiatives are essential.
Raising the Minimum Wages of Current Jobs
Within the context of the United States, one might begin with the following benchmark – individuals who are employed full-time throughout the year (defined as working 40 hours per week over a 50 week period) should be able to generate earnings that will enable them to lift a household of two above twice the poverty threshold. This is the standard that we use in our labor market simulator. For 2022, this comes out to approximately $18.30 an hour.
An individual working full-time during the year (50 weeks at 40 hours per week) would earn a total of $14,500, far short of the $36,620 needed to lift a household of two above twice the poverty line in 2022.
There are two specific ways of accomplishing this. One is to raise the minimum wage to a suitable level, and then index it to inflation so that it holds its value into the future. This puts the onus of such an increase upon the employer. A second approach is to provide a tax credit (such as the Earned Income Tax Credit) that supplements workers’ wages so that their total income for the year lifts them above the poverty line. This places the onus upon the taxpayer.
The minimum wage in the U.S. went into effect in October 1938 at an initial level of $.25 an hour. The basic concept was that no employee should fall below a certain wage floor. There was an underlying principle that workers should receive a fair wage for a fair day’s work. However, unlike Social Security, the minimum wage has never been indexed to inflation; changes in the minimum wage must come through congressional legislation. Years often go by before Congress acts to adjust the minimum wage upward, causing it to lag behind the rising cost of living. The current minimum wage in the United States stands at $7.25 an hour, a rate that went into effect in July 2009. An individual working full-time during the year (50 weeks at 40 hours per week) would earn a total of $14,500, far short of the $36,620 needed to lift a household of two above twice the poverty line in 2022.
As noted, to lift such a family above twice the poverty line for a household of two, an individual needs to be earning at least $18.30 per hour. Consequently, what is needed is to raise the minimum wage to $18.30 per hour, and then index this each year to the rate of inflation in order to maintain its purchasing power. The phase-in period to raise the minimum wage to $18.30 per hour might take place over several years in order to spread out the increase. Indeed, many states currently have minimum wages much higher than the federal minimum wage.
The positive impact of tying the minimum wage to twice the poverty level for a household of two and then indexing it to the rate of inflation would be substantial. First, it would establish a reasonable floor below which no full-time worker would fall. Second, it would reinforce the value that Americans have consistently attached to work. Third, it would remove the political wrangling from the minimum wage debate. Finally, it would address in a limited way the increasing inequities between CEOs who earn 300 or 400 times what their average paid workers earn.
One of the criticisms often mentioned when proposing to raise the minimum wage is that it leads to a rise in the unemployment rate. The argument is that as workers’ labor becomes more expensive, employers hire fewer workers. However, the empirical research over the past 20 years has shown that this effect is small to nonexistent. However, it should also be mentioned that the bulk of this research has examined rather modest increases in the minimum wage.
It should also be noted that in today’s dollars, the minimum wage in 1968 of $1.60 an hour would represent $13.08 in 2022. Consequently, raising the minimum wage to $18.30 dollars an hour is not out of line with its purchasing power in the past.
Earned Income Tax Credit
A second approach for supplementing and raising the earnings of low-income workers is through the tax structure, specifically through the use of tax credits. The primary example of such a credit in the U.S. is the Earned Income Tax Credit (EITC). The EITC was enacted in 1975 and underwent a significant expansion during the 1990s. In fact, it currently represents the largest cash antipoverty program in the U.S. and is frequently considered one of the more innovative American economic policy ideas.
In 2018, it was estimated that 28 million Americans benefitted from the EITC, and along with the Child Tax Credit, pulled approximately 10.6 million individuals above the poverty line who otherwise would have fallen into poverty.
The program is designed to provide a refundable tax credit to low-income workers, with the vast majority going to households with children. In 2021, a family with one child could qualify for the EITC if its earned income was below $42,158 (or $48,108 for married couples), while a family with three or more children could qualify if its household income was under $51,464 (or $57,414 for married couples). The maximum credit for a one-child family was $3,618; the benefit rose to $6,728 for a family with three or more children. The credit is normally received in a lump-sum payment as part of an overall tax refund for the previous year. Since it is a refundable credit, families receive the payment even if they do not owe any taxes.
The goals of the EITC are to deliver economic relief at the low end of the earnings distribution and to furnish a strong work incentive. An individual cannot qualify for the EITC without earned income, and the impact is particularly strong at the lower levels. For example, for a head of household with one child that was earning $7.50 an hour (and her total earnings were under $10,000) the EITC would effectively raise her wage by an additional $3.00 an hour, to $10.50 an hour.
The program thus provides a significant supplement to low earners as well as an incentive to work. In 2018, it was estimated that 28 million Americans benefitted from the EITC, and along with the Child Tax Credit, pulled approximately 10.6 million individuals above the poverty line who otherwise would have fallen into poverty. For families that remain in poverty, the EITC has helped to reduce the distance between their household income and the poverty line. It has also enabled families to purchase particular resources that can improve their economic and social mobility (e.g., school tuition, a car, or a new residence) or to meet daily expenses.
In terms of the problem of producing enough jobs, in many ways this is a much more difficult task than supplementing and raising the wages of existing jobs. Nevertheless, it is essential that a sufficient number of jobs be available to meet the demands of the existing labor pool.
Various labor demand policies have the potential to generate a more robust rate of job growth. Several approaches can be taken. First, economic policy should seek in a broad way to stimulate job growth. This would include fiscal policies such as increasing government expenditures, enhancing tax incentives for investment, or enacting consumer tax cuts. The strategies of investing in a “Green New Deal” and the “Social Infrastructure” could be specific targets of such investment. Monetary policy can also provide a stimulus by making access to credit easier and cheaper.
A second approach is to provide targeted wage subsidies to employers in order to stimulate job creation. Although the details of such programs can vary considerably, the basic concept is that an employer receives a monetary subsidy for creating a position and/or hiring an individual (often from a targeted population) that the employer might not have hired without such an incentive. This approach could be aimed at businesses and industries that are potential employers of individuals from lower-income or lower-skill backgrounds.
A third strategy for creating jobs is through public service employment If done carefully and judiciously, they can help increase employment without displacing other workers, and they can produce genuinely valuable output. Such an approach appears particularly pertinent for those out of work for long periods of time.
Taken as a whole, an overall strategy for reducing poverty must begin with a set of policies that will increase the availability of jobs that can economically support families above the poverty threshold. To a large extent, poverty is the result of not having a job, or having a job that is not able to viably support a family. Policies must address these shortcomings in order to alleviate poverty.
Universal Basic Income
An alternative policy strategy that approaches income in a substantially different manner than the employment policies we have been discussing, is what is known as a universal basic income or guaranteed income. The concept has been proposed at various times over the past few centuries. In fact, Thomas Paine, the author of Common Sense in 1776, was an early proponent of a guaranteed income.
The basic structure would be that every citizen in the United States is guaranteed a set amount of income from the government. This income would be received on a monthly or bimonthly basis. Every adult would be entitled to this income, regardless of whether they were employed or not.
Thomas Paine, the author of Common Sense in
was an early proponent of a guaranteed income
Advocates argue that such an approach is a straightforward and effective way of addressing poverty – since poverty is a lack of income, providing a guaranteed minimal income can substantially reduce poverty directly. In addition, the argument is made that this represents a possible solution to a future in which automation and artificial intelligence is likely to dominate the work place, potentially reducing the number of jobs. On the other hand, opponents point out the possible work disincentives embedded in such a program as well as the overall cost.
The United States seriously considered the idea of a guaranteed income in the early 1970’s with President Richard Nixon proposing to Congress a variant of this idea. Currently, several countries have been exploring the feasibility of such a policy, most notably Finland and Switzerland. In addition, the idea has been gaining traction within the progressive wing of the Democratic Party.
For example, Democratic candidate Andrew Yang made it the focal point of his 2020 bid for the presidency. Yang proposed giving all U.S. citizens over the age of 18 a guaranteed payment of $1,000 per month, or $12,000 for the year. He argued that such assistance would dramatically cut the rate of poverty.
There have been a number of experiments and trials that have sought to examine the feasibility and effects of a universal basic income. What these studies have generally found is that increasing the amount of income to poverty stricken families makes a significant difference in the well-being of children and parents. As Jeff Madrick writes, recent research, “has increasingly shown that low income itself is key, and arguably the major cause of the debilitating outcomes in cognition, emotional stability, and health for poor children. The countless studies reinforcing this claim are an important breakthrough . . . Now we know that there is growing evidence that universal cash transfers, money itself, can solve or mitigate many problems.”
Consequently, programs that direct additional income to such families see significant gains in the physical and mental well-being of children and adults.
The concept of a child cash allowance is a similar idea. Throughout many European countries, families with children under 18 receive a monthly cash payment. This applies to all children, regardless of their circumstances. The idea behind this policy is that parents with young children are in need of additional economic help in raising their children, and that such assistance allows parents to spend more time with their children.
The Biden Administration basically put in place for six months a child cash allowance from July 2021 to January 2022. Most families with children qualified for the benefit of 300 dollars a month. It was estimated that such a policy cut child poverty by 45 percent.
Nevertheless, such policies face an uphill battle in the United States. Given our deep seated values around rugged individualism, the idea of giving people money without something in return may not be palatable in at least the near future.
Key to any policy strategy of reducing poverty is the importance of ensuring enough livable wage jobs for all who need them. It appears patently wrong that many Americans are working and yet still find themselves in the throes of poverty. This violates the basic principle that hard work should be the means for getting ahead in life.
Too many Americans find themselves working hard yet falling further behind. Wages have stagnated over the past 50 years, benefits have shrunk, and job security has become more tenuous. It is no wonder that more Americans are facing the prospect of economic insecurity.
A major policy focus on supporting workers and their families is clearly in order. In the past, unions had played an important role in protecting worker’s rights and benefits. Yet union membership has fallen from a high of 35 percent of all workers in the private sector, to its current level of 6 percent.
In order to alleviate poverty, policies must focus on supporting lower wage workers. Such strategies include raising the minimum wage, strengthening the Earned Income Tax Credit, and pursuing macroeconomic demand policies. In addition, a universal basic income and child allowance are policies that may become more important as the nature of work is transformed in the future.