Public Policies for the Working Poor: The Earned Income Tax Credit Versus Minimum Wage Legislation

This paper first documents the decades-long erosion of the link between low wages and low household income. It then simulates the consequences of this determination on the relative gains of programs designed to help the working poor—minimum wage increases under the Fair Labor Standards Act and increases in the Earned Income Tax Credit (EITC). Using data from the Current Population Survey it is found that increases in the EITC between 1989 and 1992 were far more target-efficient than was the increase in the minimum wage from $3.35 to $4.25 and that the 1993 extension of the EITC is far more target-efficient than raising the minimum wage from $4.25 to $5.00. The paper concludes that the EITC is a far more effective mechanism for targeting low income workers than are increases in the minimum wage