What is the effect on a minimum wage worker, who claims SNAP benefits and the Earned Income Tax Credit--EITC (for the "working poor"), when the minimum wage is increased? Each of these benefits decrease as the reported income to claim the benefits increases.
Assumptions: single parent of 2 dependent minor children. Pays $600 per month in rent and $350 per month in child care (these could be high or low. I just picked two reasonable numbers).
Minimum Wage of $7.25 X 40 hours per week X 4.3 weeks in a month = $1,247.00 in monthly market income.
SNAP Benefits at this monthly market income = $453.00 per month (Calculator here)
EITC at this market monthly income = $462.00 (Calculator here)
Total market income and transfer payments = $2,162.00
Hours worked in a month at 40 hours per week X 4.3 weeks in a month = 172 hours.
Effective hourly wage ($2,162.00/172) = $12.57 per hour
Minimum Wage of $10.10 X 40 hours per week X 4.3 weeks in a month = $1737.00 in monthly market income.
SNAP Benefits at this monthly market income = $342.00 per month (Calculator here)
EITC at this market monthly income = $413.00 (Calculator here)
Total market income and transfer payments = $2,492.00
Hours worked in a month at 40 hours per week X 4.3 weeks in a month = 172 hours.
Effective hourly wage ($2,492.00/172) = $14.49 per hour
Notice what happened here. The minimum wage increased by $2.85 per hour (from $7.25 to $10.10), but this person's effective income to actually purchase stuff, market income plus transfer payments, increased only by $1.92 ($14.49 per hour - $12.57 per hour).
I rarely hear this talked about, especially by proponents of an increase in the minimum wage. While there is an actual increase in total compensation, hence potential consumption for this person, it is not as much as is touted.
The market income increases, but the transfer payments DECREASE as well which reduce the impact of the mandatory wage increase.
Anyway, I thought it interesting. I hope you do too.
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Very interesting article!
ReplyDeleteI am a fellow AP teacher who is working on an AP Economics Review site. While looking to see what else is out there, I ran into your blog (looks awesome by the way). I noticed that you have a couple dead links and wanted to let you know about them. The Exploration in Economics and Whiteboard Marketplace links aren't coming up.
My site, apeconreview.com is a place where students can review AP Economics right before the exam. It has study guides, overviews of AP topics, and flash review activities. If you think it would be helpful to your students or your readers, feel free to add a link to your site.
Take care,
Jake Reed