To boost incomes, Uncle Sam should lend a hand
Low wages in the US are unlikely to rise. And other ways to increase household income, such as two earners and easy credit, have run their course. Washington can immediately help Americans struggling to make ends meet by expanding the successful earned income tax credit.
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Meanwhile, additional developments now push against wage growth: computerization, stagnant educational attainment, the shift of employment from manufacturing to services, a more general trend away from middle-paying jobs, a rise in less-skilled immigration, a shift toward pay for performance, and a declining real minimum wage.Skip to next paragraph
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Inflation-adjusted wages in the bottom half of the earnings distribution did rise briefly in the late 1990s. This was helped by a low unemployment rate ("full employment"), which forced companies to compete more with each other for employees. But I suspect that if and when America again nears 4 percent unemployment, the Federal Reserve, ever obsessed with lurking inflation, will head off wage growth by stepping on the monetary brakes.
What, then, can be done?
Some of the key contributors to wage stagnation, such as technological change, global trade, and immigration, also yield benefits that would be a shame to forgo.
One often-overlooked contributor to living standards is public goods and services. Government provision or subsidization of safety, schools, health care, roads, and so on expands consumption.
Improving educational attainment might help. Only 75 percent of young Americans graduate from high school, and just 35 percent complete a four-year college degree. An especially valuable addition would be good-quality, affordable early education. But boosting school completion rates is difficult, and the payoff is likely to come only in the long run.
A fast-acting solution
To get household incomes rising sooner, I suggest expanding the Earned Income Tax Credit to make it a full-blown middle-class earnings supplement. In its current form, the EITC rises with household earnings up to about $13,000 (for a family with two children), then stays at a flat level, and then begins to decrease, reaching zero at earnings of about $40,000. The maximum EITC benefit amount is around $5,000.
It's a very good program, boosting the incomes of households with low earnings while encouraging employment. It could be revised to better help working Americans without children and to reach households further up the income distribution.
Tying the benefit level to average earnings would ensure that it rises over time in inflation-adjusted terms, helping to narrow the gap between growth of the economy and growth of household incomes.
This proposal is unlikely to get much of a hearing in today's political climate. But politics can shift quickly and in unexpected ways. With wisdom and public pressure, we may find our way back to reliable income growth for ordinary Americans.