Some criticisms of the minimum wage are that it actually leads to increased unemployment as employers are forced to cut jobs to keep up with increased labor costs, can drive up inflation, and that the minimum wage is not updated often enough to allow it to provide a basic income necessary to cover the needs of the people it is intended to help.
Politicians and economic experts have come up with a few alternatives to the minimum wage, which they have proposed over the last few decades. Proponents of these alternatives to the minimum wage say these new options would more effectively and efficently address poverty than the minimum wage, and would not have as many adverse economic side effects as the minimum wage. Some of these alternatives to the minimum wage have been tried with varying degrees of success in other nations, and some U.S. states have also experimented with these options.
Providing a refundable tax credit
This minimum wage alternative is already in practice to some degree in the form of the Earned Income Tax Credit. The EITC provides a tax credit to low income workers, even if they have no federal income tax liability. For example, if John is a low income worker who had $1,000 in federal taxes withheld from his paycheck last year, but his tax liability comes to zero when he files his taxes and he also qualifies for a $500 EITC, John will get $1,500 in a tax refund, even though he only paid in $1,000. A refundable tax credit program would be like the EITC, but on a larger scale. Once again, a key argument in favor of this over the minimum wage is that it would be less likely to result in higher labor costs to employers, unlike the minimum wage.
Providing a basic income
One leading alternative to the minimum wage is for the federal government to provide a basic income to its citizens. Under this system, which resembles Social Security, the federal government would provide each citizen with a periodic allocation of money that should meet the basic living needs of a person or family. The basic income would not be subjected to a means test, meaning that the richest and the poorest citizens would receive the funding. Economists and other experts in favor of a basic income scheme say that a basic income plan based on a wide and varied tax base would be much more economically efficient than the current federal minimum wage, which they say unfairly burdens employers with a high marginal tax, which creates losses in efficiency and eventually, more unemployment.
The basic income is one of the older alternatives to the minimum wage, and has some pretty high profile supporters such as John Kenneth Galbraith, Milton Friedman and James Tobin. In the late 1960s, more than a thousand economists signed a petition to the U.S. Congress calling for a basic income system.
A potential drawback of the basic income would be the disincentive to work it would provide. Some economists argue that if citizens are provided a basic income, many will choose not to work and to make do on subsistence income.
Providing guaranteed minimum income
A guaranteed income is a modified version of the basic income scheme. There are more conditions to this minimum wage alternative, and it would be subject to a means test, whereas the basic income would not. Other stipulations for the guaranteed minimum income include requiring recipients to participate in community volunteering or requiring them to have jobs. These requirments may placate some critics who feel that basic income or guaranteed income schemes would result in an increased number of people choosing not to work.
Let’s make a deal
In some countries, no minimum wage is required by law to be paid by employers. Instead, the minimum wage is set in different industries by a collective bargaining agreement. Sweden is one country where this system is at work. The most recent round of negotiations occurred in 2004, and resulted in a seven percent increase in wages in most industries over a three-year period.
While some of these alternatives may look appealing, it’s highly unlikely that the U.S. government will repeal the minimum wage any time soon. Instead, it’s likely that the U.S. government may seek to combine some of these options with the existing minimum wage scheme.