Minimum Wage Mandates and the Safety Net: Do Gains Outweigh Losses?

Background and Purpose: In 2014 the City of Seattle passed into law an ordinance mandating a substantial increase in the city minimum wage. Seattle wage floors will increase gradually over the next several years to become the highest in the nation. By 2017, most low-wage jobs for large employers will pay $15 per hour; all private sector employers must pay an inflation-adjusted version of this level by 2021.

Wage mandates represent an important area of current social justice work. While better pay for workers certainly aligns with Social Work values, higher earnings are not unambiguously financially good for workers that also participate in means-tested benefit programs or claim the federal Earned Income Tax Credit.  For instance, a household that receives federally-funded food assistance via the Supplemental Nutrition Assistance Program (SNAP) will see benefits decreased by $.30 for each additional dollar earned.  The effective marginal tax on earnings that arises from the phase-out of means-tested benefits is a by-product of social programs that target assistance to the most needy – and can lead to confusing and contradictory circumstances for working families who experience it (Romich, 2006).  

The purpose of this paper is to describe the interaction between minimum wage mandates and the means-tested safety net by modeling the impact of increased wages on benefit receipt.

Methods:  We draw on benefit formulas to model the impact of wage changes on exemplar family types.  Programs modeled include SNAP, housing assistance, Washington State Working Connections Child Care, and the federal EITC.  In each case we model net family income for adults working part- or full-time and the household participating in each permutation of the program set.  

Results: Simulation results based on an exemplar parent with two children show wage increases leave families better off but not by much in many cases.  Based on 15 models examining raises from the current state minimum to $11 (the 2015 standard) or $15 per hour across five different program permutations, we find an average effective marginal tax rate of 72.5%. Families that file taxes but do not participate in benefits face the lowest rate of 24.1% while families that use all three modeled programs (SNAP, housing and child care) face a marginal tax rate of 114.9%.  That is, these families are on net worse off than they would be in the absence of the minimum wage increase.   

Conclusions and Implications:  These simulations show that mandated higher wages will increase the cash income and decrease the means-tested benefits of many but not all low-income families. This will result in lower direct public outlays on benefits and greater flexibility for families. However, for families that depend on multiple programs, raises could trigger increases in co-pays and decreases in benefits that make the family on net worse off.  Because subsidized child care drives this effect, we discuss ways in which child care subsidy programs could adjust rules to better support family advancement.