The Redistributive Effects and Cost-Effectiveness of Increasing the Federal Minimum Wage

Abstract

Simulation methods are used to investigate the cost-effectiveness and poverty-reducing effects of the Fair Minimum Wage Act of 2007 (FMWA). The data set is created by matching and merging the Annual Social and Economic Supplement (March CPS) with the Earner Study files, which contain the best available information on wages, hours, and earnings. Three 70¢ increments in the minimum wage are compared to alternative labor market policies that could have been adopted in lieu of the FMWA. Specifically, the costs of rising minimum wages are compared to the costs of equiproportionate increases in the earned income tax credit (EITC) and equiproportionate reductions in Federal Insurance Contributions Act (FICA)(payroll) taxes of workers in low-income families that achieve the same poverty-reducing policy objective. The FMWA simulations are expanded to evaluate a hypothetical extension of the federal minimum wage to $9.50. The overall redistributive effects of the FMWA, the hypothetical $9.50 minimum wage, and the alternative EITC and FICA labor market policies are also compared.

Keywords

minimum wage poverty earned income tax credit FICA tax

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