Saturday, December 10, 2011
In nearly all 34 countries with modern economies, inequality is rising, a new study by the Organization for Economic Cooperation and Development shows. The gap is especially pronounced in the United States where the country's largest program to alleviate poverty may be adding to the problem, not alleviating it.
The United States ranks fourth in income inequality after Chile, Mexico, and Turkey. In the U.S. the best-off 10% make on average 15 times the incomes of the poorest 10th, compared to a six to one ratio in the Nordic countries, Austria, Hungary and Switzerland.
The OECD report, published on Monday, cites the U.S. earned income tax credit as an explanation for a sharp increase in the hours worked by low-wage Americans. The tax credit, the largest U.S. program to alleviate poverty, is meant to be an incentive to work, but it may also contribute to poverty, effectively holding down wages of all low-skilled workers. Now how is that?
Imagine that more people whose skills limit them to low paid work decide to work more hours so they can get the credit. Add in people who have the skills for better-paid work but cannot find it and so take lower-paid jobs because of the implicit supplement to their wages provided by the earned income tax credit.
The result is more workers seeking more work, allowing employers to hold back wage increases or even reduce wages because of the enlarged supply of labor. The employers benefit. The American median wage, in 2011 dollars, has hovered at just above $500 for more than a decade. ...A pernicious problem in America is people who work but whose wages are too low for them to afford a decent life. ...
The data indeed show that the flood of low-income workers, especially single mothers, is depressing the wages of all low-skill workers. One of four Americans with a job earns less than $15,000 and average income is less than half that. ...
The earned income tax credit has grown rapidly and now benefits 26 million low-income individuals and families, primarily single parent households. The annual cost is approaching $60 billion. ...
If the earned income tax credit, combined with the end of welfare as we knew it, hold down wages for low-skill workers then it is time to find smarter ways than Chicago School theories to reduce poverty for those who work.