Josh Barro, Columnist

A Smarter Alternative to Raising the Minimum Wage

Josh Barro explains why raising the earned-income tax credit is preferable to increasing the minimum wage.Â

February 13, 2013 at 7:33 PM UTC

Josh Barro is the lead writer for the Ticker, Bloomberg View's blog on economics, finance and politics. His primary areas of interest include tax and fiscal policy, state and local government, and planning and land use. Previously, Barro was a Senior Fellow at the Manhattan Institute for Policy Research and a commercial real estate banker at Wells Fargo. He holds a bachelor's degree in psychology from Harvard and lives in Queens, New York.

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One of President Barack Obama's biggest proposals in yesterday's State of the Union Address was a big minimum wage increase, from $7.25 per hour to $9. The trade-off with any minimum wage increase is that it reduces inequality and poverty, but may raise unemployment. As Evan Soltas wrote for the Ticker last month, within the wage range that is on the table, the former effect should be substantial and the latter effect small, if existent. So, raising the minimum wage is a better idea than doing nothing.

But while a higher minimum wage is a way to address poverty, it's not the best way. It would be preferable to increase the Earned Income Tax Credit, a government program that makes payments to workers in low-income households. Unlike a higher minimum wage, a larger EITC would not create any disincentive to hire; and while some of the benefits of a minimum wage hike will go to teenagers in middle-class households, everyone who benefits from the EITC is poor.