Minimum wages reduce employment of low-skilled workers, yet political support for minimum-wage increases is so strong that they seem inevitable. What to do? I have developed a proposal for a high-wage tax credit. The HWTC preserves the direct benefits of higher minimum wages—namely, higher wages for low-wage workers—while mitigating the harm.
When the government increases the minimum wage, the HWTC would provide a tax credit of 50% of the difference between the prior minimum wage and the new minimum wage for each hour of labor employed. It would phase out at wages above the new minimum wage and, as wage inflation erodes, the value of the new minimum wage.
The HWTC would accomplish three main goals. First, by offsetting part of the cost of higher minimum wages, it would reduce employers’ incentives to substitute away from low-skilled workers in favor of higher-skilled ones and machines. It would also moderate price increases that would otherwise lower product demand.
Second, it would transform the minimum wage into a more sensible redistributive policy. Most redistributive policies transfer money from high-income households to low-income ones via the tax system. The minimum wage, by contrast, takes money from business owners, who may not have high incomes themselves. By operating through the tax system, the HWTC would transfer some of the cost of higher minimum wages away from owners of businesses like child-care centers and restaurants, and toward high-income taxpayers.
Third, the HWTC would encourage better decision making about alternative policies to combat inequality. Voters think income inequality is too high, and politicians who want to keep their jobs must respond. Raising the minimum wage sounds like a good way to reduce income inequality, even if other policies, such as the Earned Income Tax Credit, do more to help the poor. By shifting some of the cost of higher minimum wages to taxpayers, the HWTC would put the minimum wage on a more equal footing with other redistributive policies. Policy makers and voters could then choose among alternative policies based on their actual benefits, rather than their misperceived costs.
Because the HWTC would cause taxpayers to bear a burden for minimum-wage increases, a critic might see it as a cynical ploy to restrain minimum-wage increases. But it would be hard to fault the HWTC for slowing the rate of minimum-wage increases if this occurs because voters and policy makers better understand and weigh the costs of these increases. Further, the HWTC should reduce the business community’s opposition to minimum-wage increases, by reducing the costs to affected businesses.
Thus, the HWTC might speed rather than slow the transition to higher minimum wages, but in a way that limits the severity of job losses among low-skilled workers. Or the HWTC might encourage policy makers to choose alternative policies, like the EITC, that do a better job of helping workers in low-income families—by encouraging work rather than eliminating jobs and directing benefits to low-income families. Either outcome would benefit workers struggling to make ends meet.
Mr. Neumark is a professor of economics at the University of California, Irvine, where he directs the Economic Self-Sufficiency Policy Research Institute. His work on the HWTC proposal was supported by the Aspen Institute Economic Strategy Group.