Forget about raising the minimum wage to $15 an hour or giving low-income earners a big tax credit at the end of the year. Why not have the government boost every paycheck a low-wage worker gets?
At least that’s what Oren Cass would do. He’s a senior fellow at the conservative think tank Manhattan Institute. He proposes that the government dole out a wage subsidy to low-wage workers, bringing their pay up to an hourly level that would be set by Congress. Every hour they work means extra money from the government.
Republican presidential candidate Marco Rubio spoke about a similar plan, referring to a “federal wage enhancement” in a 2014 speech.
Such a move wouldn’t place a burden on businesses like raising the minimum wage — which critics say could raise consumer prices and lead to a reduction in the overall number of available low-wage jobs.
“Low-wage employers should be seen as part of the solution to the problem, not the place where we should get all the money from,” says Cass, who worked on Mitt Romney’s 2012 campaign as domestic policy director. “Getting more high school graduates who are not going to college into the labor force and working is a top priority.”
A wage subsidy would also have a different impact on the working poor than the Earned Income Tax Credit (EITC), because the payments would show up in every paycheck instead of one lump sum during tax season. The regular, smaller payments would incentivize people to work more hours and be helpful for workers struggling to get by each week, says Cass.
While the EITC has been credited with lifting millions of people out of poverty and is hailed by both Democrats and Republicans, it does favor families over individual workers. Cass says a wage subsidy would benefit every low-wage worker based on the same criteria.
Taxpayers already assist low-wage workers. One study from the University of California-Berkeley that was funded by the Service Employees International Union found that more than $150 billion of public money is used to support low-wage workers.
Cass believes the $66 billion the federal government currently spends on the EITC could be transferred into wage subsidies so the policy would be budget neutral.
But not everybody believes a wage subsidy is the best use of public funds.
Because the supplement is based on the amount the worker earns hourly, employers would have an incentive to pay people lower wages, says Ken Jacobs, chairman of the Labor Center that published the UC Berkeley report.
“So you’re likely to increase the amount that taxpayers are paying for low-wage work,” says Jacobs. “I think you’d have very little voter support for creating a wage supplement for low-wage employers.”
Instead he believes there needs to be both a minimum wage hike and government subsidies for the working poor. “The policies aren’t competitive. They are complementary,” he says.
Executing a wage subsidy would be another hurdle.
Cass argues that it could work like payroll taxes. But instead of taking the taxes out of each paycheck, money would be added back into a low-wage worker’s pay.
But Eugene Steuerle, a fellow at the Urban Institute who has proposed reforms to the EITC, says it’s not that easy.
“How much subsidy do you want to be providing to somebody who is making a small amount for one part of the year and a larger amount later in the year? What about people with multiple jobs? There’s a huge issue with the self-employed. The self-employed could report any number of hours.”
Steuerle says he’s “very sympathetic” to the difficulties of reforming programs for the poor. “But the administrative details matter.”
That being said, Steuerle thinks “there’s widespread agreement today — both for economic and political reasons — that we should be moving redistribution money into incentivizing employment.”
Cass agrees. “In general, conservatives have, looking back over the last few decades, focused so much on making government smaller, that they focused on making anti-poverty programs smaller, too.”
Now, he thinks the time is ripe for innovation when it comes to fighting poverty.
