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Letter to the Honorable Charles E. Grassley: Responses to a Request by Senator Grassley about the Effects of Increasing the Federal Minimum Wage versus Expanding the Earned Income Tax Credit 1 (January 2007)

handle is hein.congrec/cbo9525 and id is 1 raw text is: CONGRESSIONAL BUDGT OFFICE U.S. Congress Washington, DC 20515 January 9, 2007 Honorable Charles E. Grassley Chairman Committee on Finance United States Senate Washington, DC 20510 Dear Mr. Chairman: In response to your request, the Congressional Budget Office (CBO) analyzed some of the potential consequences of a hypothetical increase in the federal minimum wage rate from $5.15 per hour to $7.25 per hour and of several hypothetical expansions in the earned income tax credit (EITC). To provide the information, as requested, about the potential impacts on workers whose family income was below the federal poverty threshold, the analysis used data from the March 2005 Current Population Survey (CPS). The analysis is subject to a number of limitations and should not be interpreted as a cost estimate of the effects of implementing changes in the federal minimum wage or the EITC in future years. CBO simulated the impacts of those policy options as if they were in effect in 2004 and did not incorporate any effect on employment levels or the number of hours worked. Since that time, the number of workers with wage rates in the $5.15 to $7.25 range has fallen by almost 30 percent and is expected to continue to decline as increases in state minimum wage rates and other changes in the labor market occur. For simplicity, CBO assumed that an increase in the minimum wage rate would have affected only the wage rates of workers earning between the old and the new minimum rates. Some workers with wage rates outside that range might also be affected by an increase in the minimum wage. For example, employers are permitted to pay certain tipped workers as little as $2.13 per hour if their tips bring their total hourly earnings up to the federal minimum wage; thus, an increase in the federal minimum wage could cause some of those employers to raise their wage rates. Also, some employers of workers already paid at or just above the new minimum wage rate might increase those workers' wage rates as well. In addition, the CPS does not contain all of the information needed to compute the EITC, limiting the accuracy of those estimates. Based on the CPS, the estimated amount of ElITC payments in 2004 was about 25 percent below the actual amount that year. CBO does not have a basis to infer whether that discrepancy would lead to an underestimate or an overestimate of the share of additional payments resulting from the hypothetical expansions of the EITC that would go to poor

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