Economic Snapshot | Wages, Incomes, and Wealth

If you work, then you shouldn’t be poor

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Snapshot for March 22, 2006.

If you work, then you shouldn’t be poor

Guided by the sentiment that if you work you shouldn’t be poor, lawmakers in the 1990s made improvements in two policies that, taken together, ensured that full-time, year-round work would provide an income at or above the poverty line.  Raising the minimum wage from $4.25 to $5.15 in 1996-97 directly improved the wages of 9% of the workforce—almost 10 million workers—and indirectly raised the wages of millions more low-wage workers. Improvements in the Earned Income Tax Credit (EITC) and a new refundable Child Tax Credit also rewarded work and supplemented wages. After the minimum wage increase, the combination of full-time, year-round work and the above-mentioned federal tax credits resulted in a net income for a parent with two children equal to 105% of the poverty line in 1997. 

Although there is broad agreement that, for a family to pay for the basic essentials, it actually requires an income level of around twice the poverty line (higher in some areas),  improving the minimum wage and EITC still meant important progress for a substantial number of struggling families.
Nine years later, however, the system has broken down. The minimum wage has not kept pace with inflation and thus has lost 20% of its previous purchasing power. To exacerbate the problem, the EITC levels are linked to inflation, so for the last two years a person can work full-time, year-round at the minimum wage but still not be eligible for the maximum EITC. The combination of an out-of-date minimum wage and the existing federal tax credits mean that this same parent of two now only earns 89% of the poverty line.

Minimum wage workers and the poverty threshold
A minimum wage increase from $5.15 to $7.25 would return the value of full-time work to just above its 1997 level and renew the nation’s commitment to working families.

This week’s Snapshot was written by EPI economist Jeff Chapman.   

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