Rising wage inequality and stagnant real wages have contributed to inequality in family incomes during the past three decades. While the expansion of the Earned Income Tax Credit (EITC) and the Supplemental Nutrition Assistance Program (SNAP) have helped mitigate the impact on low-income families (Bitler and Hoynes 2010), federal minimum wage policy has not contributed to the solution. The federal minimum wage has failed to keep pace with both the cost of living and the median wage in the labor market. As a consequence, working full-time at the minimum wage does not allow many families to escape poverty, or to attain economic self-sufficiency.

State and local governments can set minimum wages in excess of the statutory federal minimum wage. Indeed, state and local governments have played an important role in establishing minimum wages across the country; as a result, thirty-seven states had state minimum wages exceeding the federal level in 2007 prior to the most recent federal increase. Cities, too, have begun setting higher minimum wages, as evidenced by city-level wage minimums in Albuquerque, San Francisco, San Jose, Santa Fe, Seattle, and Washington, DC; other cities are actively exploring possibilities of raising minimum wages. 

In this policy memo, I propose a framework for effective state and local minimum wage policy. First, I propose using half the local-area median wage as an important gauge for setting an appropriate level of the minimum wage. Second, I propose that state and local governments take into account the local cost of living as a relevant consideration in setting a minimum wage, and I provide estimates of how state minimum wages would vary if they reflected cost-of-living differences. I also recommend the use of regional consumer price indexes (CPIs) to index the local minimum wage. Finally, I propose that cities and counties coordinate regional wage setting to mitigate possible negative effects of local mandates. 

The implementation of the state and local framework does not override the need for reform at the federal level. Thoughtful reforms to the federal minimum wage can help reduce poverty and mitigate inequality. The federal minimum wage has been the focus of substantial debate by academics and policymakers; this proposal focuses on state and local reforms that have received substantially less attention. These state and local reforms can be an important part of the policy portfolio for reducing the incidence of poverty and for helping low-income families support themselves as they strive toward the middle class. In particular, although the federal minimum wage serves as a floor in the labor market, there is some room for additional increases in higher-wage areas.

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• Designing Thoughtful Minimum Wage Policy at the State and Local Levels - Full Text

Reducing inequality and expanding opportunity are central challenges increasingly acknowledged by leaders across the political spectrum. Policymakers generally agree that one key solution is to prepare young people and adults with the skills to earn a good income. Unlike other advanced countries, however, reform proposals in the United States have typically included little or nothing about apprenticeship—a highly cost-effective mechanism for developing workplace skills and for reducing youth unemployment. However, interest in apprenticeship models is building in the United States, partly because of the recent successes of Britain and South Carolina in stimulating major expansions of apprenticeship training. A robust apprenticeship system is especially attractive because of its potential to reduce youth unemployment, improve the transition from school to career, upgrade skills, raise wages of young adults, strengthen a young worker’s identity, increase U.S. productivity, achieve positive returns for employers and workers, and use limited federal resources more effectively.

Apprenticeship prepares workers to master occupational skills and achieve career success. Under apprenticeship programs, individuals undertake productive work for their employer, earn a salary, receive training primarily through supervised work‐ based learning, and take academic instruction that is related to the apprenticeship occupation. The programs generally last from two to four years. Apprenticeship helps workers to master not only relevant occupational skills, but also other work‐related skills, including communication, problem solving, allocation of resources, and dealing with supervisors and a diverse set of coworkers. The course work is generally equivalent to at least one year of community college. Completing apprenticeship training yields a recognized and valued credential attesting to mastery of skill required in the relevant occupation. Unlike the normal part-time jobs held by high school and college students, apprenticeship integrates what young people learn on the job and in the classroom. Box 7-1 describes a successful youth apprenticeship program in Georgia. (See the PDF for Box 7-1).

In some ways, apprenticeship offers an alternative to the “academic-only” college focus of U.S. policymakers. Increasingly, placing all of our career-preparation eggs in one basket is leaving young adults, especially minority young men, well behind. Among young adults ages twenty-five to thirty-four in 2013, 49 percent of all women and 37 percent of African American women had earned at least an Associate degree; for men, the comparable figures were 40 percent and 28 percent, respectively. Furthermore, in 2011–12, nearly two African American women earned a bachelor’s degree for every African American male who earned one (National Center for Education Statistics 2013). Despite the well-documented high average returns to college, variations in interests, capacities, and learning styles suggest many young people would benefit far more from alternative pathways to rewarding careers than they do from academic-only pathways. 

Apprenticeship can narrow the postsecondary achievement gaps in both gender and race. Having learning take place mostly on the job, making the tasks and classroom work highly relevant to their careers, and providing participants with wages while they learn are especially beneficial to men, particularly minority men. Apprenticeship can give minorities increased confidence that their personal efforts and investment in skill development will pay off, giving graduates a genuine sense of occupational identity and occupational pride. 

Additionally, apprenticeship is a useful tool for enhancing youth development. Young people work with natural adult mentors who offer guidance but allow youth to make their own mistakes (Halpern 2009). Youth see themselves judged by the established standards of a discipline, including deadlines and the genuine constraints and unexpected difficulties that arise in the profession. Supervisors provide the close monitoring and frequent feedback that helps apprentices keep their focus on performing well at the work site and in the classroom. 

Furthermore, apprenticeship is distinctive in enhancing both the worker supply side and the employer demand side of the labor market. On the supply side, the financial gains to apprenticeship are strikingly high. U.S. studies indicate that apprentices do not have to sacrifice earnings during their education and training and that their long-term earnings benefits exceed the gains they would have accumulated after graduating from community college (Hollenbeck 2008). The latest reports from the state of Washington show that the gains in earnings from various education and training programs far surpass the gains from all other alternatives (Workforce Training and Education Coordinating Board 2014). A broad study of apprenticeship in ten states also documents large and statistically significant earnings gains from participating in apprenticeship programs (Reed et al. 2012). 

On the demand side, employers can feel comfortable upgrading their jobs knowing that their apprenticeship programs will ensure an adequate supply of well-trained workers. High levels of apprenticeship activity in Australia, Canada, and Britain demonstrate that even companies in labor markets with few restrictions on hiring, firing, and wages are willing to invest in apprenticeship training. While no rigorous evidence is available about apprenticeship’s costs and benefits to U.S. employers, research in other countries indicates that employers gain financially from their apprenticeship investments (Lerman 2014). 

In general, firms reap several advantages from their apprenticeship investments. They save significant sums in recruitment and training costs, in reduced errors in placing employees, in excessive costs when the demand for skilled workers cannot be quickly filled, and in all employees being well versed with company procedures. One benefit to firms that is rarely captured in studies is the positive impact of apprenticeship on innovation. Well-trained workers are more likely to understand the complexities of a firm’s production processes and therefore to identify and implement technological improvements, especially incremental innovations to improve existing products and processes. A study of German establishments documents this connection and finds a clear relationship between the extent of in-company training and subsequent innovation (Bauernschuster, Falck, and Heblich 2009). In the United States, evidence from surveys of more than 900 employers indicates that the overwhelming majority of them believe their programs are valuable and involve net gains (Lerman, Eyster, and Chambers 2009). Nearly all sponsors reported that apprenticeship programs help them meet their skill demands—87 percent reported that they would strongly recommend registered apprenticeship programs, and another 11 percent recommended apprenticeship programs with some reservations. Other benefits of apprenticeship include reliably documenting appropriate skills, raising worker productivity, increasing worker morale, and reducing safety problems.

While apprenticeship offers a productivity-enhancing approach to reducing inequality and expanding opportunity, activity in the United States has declined in recent years to levels about one-tenth of those in Australia, Canada, and Britain. Some believe the problems include inadequate information and familiarity with apprenticeship, an inadequate infrastructure, and expectations that sufficient skills will emerge from community college programs. Others see the main problem as an unwillingness of U.S. companies to invest, no matter how favorable government subsidies and marketing policies are. In considering these explanations, we should remember that even in countries with robust apprenticeship systems, only a minority of firms actually hires apprentices. Since the number of apprenticeship applicants already far exceeds the number of apprenticeship slots, the main problem today is to increase the number of apprenticeship openings that employers offer. Counseling young people about potential apprenticeship opportunities is a sensible complementary strategy to working with the companies, but encouraging interest in apprenticeship could be counterproductive without a major increase in apprenticeship slots. 

Developing a more robust support system for apprenticeship programs requires action at various levels of government. This proposal consists of a series of targeted initiatives that rely on both state and federal support. At the state level, governments could develop marketing campaigns to persuade employers to create apprenticeship programs, and to build on existing youth apprenticeship programs. At the federal level, the government could provide federal subsidies to encourage take-up of existing vouchers for apprenticeship programs; designate occupational standards for apprenticeship through a joint Office of Apprenticeship (OA)–Department of Commerce (Commerce) team; and develop an infrastructure of information, peer support, and research within the Departments of Commerce and Labor.

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• Expanding Apprenticeship Opportunities in the United States - Full Text

The Earned Income Tax Credit (EITC) provides a refundable tax credit to lower-income working families. In 2011, the EITC reached 27.9 million tax filers at a total cost of $62.9 billion. Almost 20 percent of tax filers receive the EITC, and the average credit amount is $2,254 (IRS 2013). After expansions to the EITC in the late 1980s through the late 1990s—under Democrat and Republican administrations—the EITC now occupies a central place in the U.S. safety net. Based on the Census Bureau’s 2012 Supplemental Poverty Measure (SPM), the EITC keeps 6.5 million people, including 3.3 million children, out of poverty (Center on Budget and Policy Priorities [CBPP] 2014a). No other tax or transfer program prevents more children from living a life of poverty, and only Social Security keeps more people above poverty.

Since the EITC is only eligible to tax filers who work, the credit’s impact on poverty takes place through encouraging employment by ensuring greater pay after taxes. The empirical research shows that the tax credit translates into sizable and robust increases in employment (Eissa and Liebman 1996; Meyer and Rosenbaum 2000, 2001). Thus, the credit reduces poverty through two channels: the actual credit, and increases in family earnings. This dual feature gives the EITC a unique place in the U.S. safety net; in contrast, many other programs redistribute income while, at least to some degree, discouraging work. Importantly, transferring income while encouraging work makes the EITC an efficient and cost-effective policy for increasing the after-tax income of low-earning Americans. Yet a program of this size and impact could be more equitable in its reach. Under the current design of the EITC, childless earners and families with only one child, for instance, receive disproportionately lower refunds. 

In 2014, families with two children (three or more children) are eligible for a maximum credit of $5,460 ($6,143) compared to $3,305 for families with one child. Married couples, despite their larger family sizes, receive only modestly more-generous EITC benefits compared to single filers. Childless earners benefit little from the EITC, and have a maximum credit of only $496—less than 10 percent of the two-child credit. 

Prominent proposals seek to mitigate these inequalities. President Obama’s fiscal year 2015 budget includes an expansion of the childless EITC, a concept outlined by John Karl Scholz in 2007 in a proposal for The Hamilton Project. Notably, MDRC is currently evaluating Paycheck Plus, a pilot program for an expanded EITC for workers without dependent children, for the New York City Center for Economic Opportunity (MDRC 2014). The recent Hamilton Project proposal for a secondary-earner tax credit addresses the so-called EITC penalty for married couples (Kearney and Turner 2013). And the more generous EITC credit for three or more children was recently enacted as part of the American Recovery and Reinvestment Act of 2009, and is currently scheduled to sunset in 2017. 

Considering this broad set of EITC reforms, and recognizing the demonstrated effectiveness of the program as an antipoverty program with numerous benefits, this policy memo proposes an expansion for the largest group of  EITC recipients: families with one child. In particular, I propose to expand the one-child schedule to be on par with the two-child schedule, in equivalence scale-adjusted terms. An equivalence scale captures the cost of living for a household of a given size (and demographic composition) relative to the cost of living for a reference household of a single adult, and is a standard component in defining poverty thresholds. The proposal expands the maximum credit for one-child families to $4,641, from $3,305 under current law, an increase of about 40 percent. The expansion will lead to a roughly $1,000 increase in after-tax income for taxpayers in the bottom 40 percent of the income distribution receiving the higher credit. As this paper outlines, the expansion is justified on equity and efficiency grounds. This expansion is anchored in the equity principle in that the generosity of the credit should be proportional to the needs of families of differing sizes; I use the equivalence scale implicit in the poverty thresholds of the Census SPM as a guide for household needs. This proposal is also supported by efficiency principles given the EITC’s demonstrated success at raising labor supply among single mothers. 

The target population for the proposal is low-income working families with children. Implementing this proposal requires legislative action by the federal government; it is important to note that altering the EITC schedule requires a simple amendment to the tax code, and not a massive overhaul of our nation’s tax system. The revenue cost of the proposal derives from additional federal costs of the EITC, less the additional payroll and ordinary federal income taxes. The private benefits include increases in after-tax income and reductions in poverty. The proposal would also generate social benefits through the spillover effects that the increase in income plays in improving health and children’s cognitive skills (Dahl and Lochner 2012; Evans and Garthwaite 2014; Hoynes, Miller, and Simon forthcoming).

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• Building on the Success of the Earned Income Tax Credit - Full Text

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• Policies to Address Poverty in America -- Full Book

British debates about welfare reform have often been influenced by American ideas. The Clinton-era welfare reforms were echoed in some of Tony Blair’s alterations to British benefits. Gordon Brown, as Chancellor, introduced a new Working Tax Credit as a direct result of studying the Earned Income Tax Credit. Brown particularly liked the political advantages of a ‘tax cut for hard-working families’, as opposed to a ‘benefit handout to welfare families’.

But now the transatlantic traffic in ideas on welfare is going the other way. The U.K.’s introduction of a single, unified system of transfer payments – the Universal Credit – is getting quite a bit of attention in the wonkier regions of D.C. politics. Paul Ryan, at a Brookings summit on social mobility, mentioned the Universal Credit (UC) as a possible inspiration for a new round of welfare reform. (Ryan is giving a speech at AEI in a couple of weeks: we’re likely to hear more about his thinking then.) When the architect of the UC, Iain Duncan Smith, visited D.C. recently, he held a series of meetings with leading Republicans to discuss his reforms.

The main attractions of the Universal Credit are fourfold:

1. Simplicity. By unifying five cash benefits and an ‘in kind’ benefit (Housing Benefit) into a single, monthly payment, the complexity of the system from the point of view of the recipient will be greatly reduced.
   
   
2. Cost control. Housing Benefit is paid directly to the landlord, which reduces the tenant’s incentive to control costs.  Add that to the crazily overheated U.K. housing market, and should come as no surprise that Housing Benefit has become a major strain on the system, quintupling in cost in real terms over the last two decades to hit £24 billion a year (c. $41bn), to become the second-biggest element of the U.K.’s system, after pensions.  By including an allowance for housing in the single cash payment in UC, the recipient will be incentivized to control their own housing costs.
    
3. Stronger work incentives. The UC has a flatter ‘taper’ than existing benefits, meaning that cash payments are reduced more slowly as earnings rise. In particular, the UC will allow benefit recipients to work part-time (less than 16 hours a week), and still keep claiming. On the downside, incentives for second earners in two-adult families will be reduced. 
   
   
4. Tighter and more targeted work requirements. The UC will contain stronger requirements to seek work than existing benefits, and importantly, has a ‘sliding scale’ of requirements, depending on the position of the recipient. For example, parents with children under the age of 1 will be exempt from work requirements; those with children aged between  1 and 5 will be obliged to attend for interviews with a case worker to prepare for a return to work; those with children at school will be required to ‘actively seek work’.

Sounds pretty good, doesn't it? And in fact it is, on paper at least. In practice the introduction of UC has been marked with huge overspend and delay on the required new IT system. The whole exercise has also been made much harder by cuts in many of the relevant cash benefits, as well as the introduction of a ‘household cap’ on total welfare receipts. The Universal Credit as an idea has a lot of support. As so often, it has been putting the idea a reality that has been difficult.

What—if anything—can the U.S. take from the UC? Short answer: not much. 

Many of the problems the UC addresses do not really apply in the U.S. Work incentives are already pretty strong in the U.S., thanks to the relative generosity of the EITC, and the relative meanness of out-of-work welfare supports. Also, there are already much stronger work requirements in the U.S. system. Some want to go further, and add work requirements to the receipt of food stamps, for example. But this would not require a major overhaul.  As Melissa Boteach and her colleagues at the Center for American Progress write,“the primary problem that the Universal Credit is supposed to address in the United Kingdom—the lack of incentive for jobless workers to enter the labor force—is far less of an issue in the United States”.

The UC also further centralizes an already highly centralized system, by getting rid of Housing Benefit, which is currently administered by Local Authorities. The U.S. system is much less centralized, with states and cities having a high degree of control over the way TANF and SNAP are administered. It is hard to see how anything like a UC could work in the U.S. at anything higher than State level. A Wisconsin Universal Credit makes sense in a way that a U.S. Universal Credit does not.  But if shifting towards block grants to states is really what this is about (see Marco Rubio’s ‘flex fund’ idea),that’s a whole different debate.

A final point. Simplicity and ease of use for the recipient is a key goal of the UC, and a worthy one. The stress and difficulties faced by low-income families just in applying for assistance is unacceptable in the 21st century. But it is not clear that the whole system has to be upended to achieve this goal. Technology ought to allow a single access point to the system, with the complexity out of sight of the user. 

In the U.K. the Universal Credit has a strong rationale, despite the implementation challenges. In the U.S., it is a solution in search of a problem. 

"It is fortunate that a major feature of American social policy is a series of programs, often referred to as the safety net, that are designed to provide people with cash and other benefits when they fall on hard times—which they are more likely to do during a recession," write the authors of a new report on the response of the Temporary Assistance for Needy Families (TANF) program—the major federal welfare program that replaced Aid to Families with Dependent Children (AFDC) in 1996—to the Great Recession that lasted from December 2007 to June 2009.

In their report, "The Responsiveness of the Temporary Assistance for Needy Families Program during the Great Recession," Ron Haskins, Vicky Albert, and Kimberly Howard write that "All in all, we conclude that the American system of balancing work requirements and welfare benefits worked fairly well, even during the most severe recession since the Depression of the 1930s."

Their report is based on three studies: (1) an examination of the changes in the TANF rolls compared to changes in AFDC rolls during previous recessions, plus changes in TANF rolls in relation to rising unemployment state-by-state; (2) a review of data on single mothers' likelihood to receive TANF benefits during the 2001 and 2007 recessions, their receipt of other program benefits, and what actions single mothers took to deal with the recession; and (3) interviews with 44 directors of state TANF programs to determine their state's response.

"An important question" noted by the authors at the outset "is whether the response of the nation's safety net program in general and the TANF program in particular was commensurate with the challenge posed by the huge level of unemployment during and following the Great Recession."

Some Results of the TANF Study

Haskins, Albert, and Howard arrived at a number of conclusions from the TANF/AFDC study, including:

• TANF rolls increased more in the 2001 recession and the 2007 Great Recession than did AFDC during previous, pre-welfare reform (1996) recessions.
• The increase in TANF rolls was greater during the period of rising unemployment in each state, which did not coincide exactly with the dates of the Great Recession, than during the official recession period nationally.
• The "nation's safety net as a whole performed well during the Great Recession and prevented millions of people from falling into poverty."

"The nation experienced 51 different recessions and 51 different responses by the TANF program to the recession,” they write. "But the key point is that measuring the rise of the TANF caseload in response to the unique increase in unemployment in each state reveals TANF to have been more responsive to the recession."

Some Results of the Single Mothers Study

• Compared with the 1990 recession before welfare reform, "single mothers were less likely to receive benefits from the TANF program during the 2001 and 2007 recessions."
• Single mothers were more likely to receive other "safety net" help such as Unemployment Compensation, Supplemental Nutrition Assistance Program (formerly food stamps), Supplemental Security Income, the Earned Income Tax Credit, and child care, school lunch and breakfast, and other benefits for their children.
• In all the 1990, 2001, and 2007 recessions, "single mothers took action on their own" by finding jobs, living with family, and other ways to "weather the recession."
• Based on income, "poverty among single mothers and their children was lower during the Great Recession than during the recession of 1990."

Given the array of available benefits, the authors conclude that:

a mother with two children earning even as little as $11,000 per year could and still can escape poverty, as measured by income that includes non-cash benefits and tax credits, because of the generosity of these benefits. In our view, the combination of strong work requirements and generous work support benefits is a reasonable policy, despite the fact that fewer mothers receive TANF now than in the past.

Some Results of the TANF Directors Study

"Arguably the people who know the most about the goals and operation of state TANF programs and how the programs responded to the recession are the state TANF directors," write Haskins, Albert, and Howard. "They were, after all, the point persons for state TANF programs before and during the Great Recession. Interviews with TANF directors can provide an insider's view of the TANF issues that we have so far analyzed from the outside." Some of their conclusions from these interviews include:

• Most states did not struggle to pay for growing TANF rolls during the Great Recession.
• Most state directors considered their state's response to the recession "as adequate or better."
• The directors had suggestions for improving the TANF program, including having more flexibility in work participation rates, gaining access to the Contingency Fund, and placing greater emphasis on job training.

Some Policy Recommendations

Although the authors believe that the TANF program worked well, especially in conjunction with other safety net programs, they suggest some potential reforms:

• TANF allows vocational training to count toward states fulfilling their work requirement, but only a maximum of 30 percent of the work requirement can be fulfilled by TANF recipients in education or training. In times of high unemployment, Congress could raise the percentage limit from 30 to 40 or even 50 percent when unemployment reaches some specified level in the state, given that most experts believe the unemployed should expand their skills through job training during recessions.
• Congress should consider changing the 12-week limit on job search during periods of high unemployment to as much as six months, given that the average period of search before finding a job increases sharply during periods of high unemployment.

Download and read the full report for complete methodology, analysis, and data.