US Economy

Economic Strategy for Higher Wages and Expanded Labor Participation

February 4, 2019  • Jason Furman & Phillip Swagel

Authors

Jason Furman, Professor of the Practice of Economic Policy, John F. Kennedy School of Government, Harvard University
Phillip Swagel, Professor in International Economic Policy, University of Maryland School of Public Policy

Working Group Members

  • Wally Adeyemo, Center for Strategic & International Studies
  • Martin Feldstein, Harvard University
  • Maya MacGuineas, Committee for a Responsible Federal Budget
  • Robert K. Steel, Perella Weinberg Partners

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Abstract

We propose two alternative policy options for promoting increased earnings and employment of low-income households: expanding the Earned Income Tax Credit (EITC) among childless workers, and implementing a wage subsidy for low-income workers that would be administered through employers. The EITC is based on household income and administered as a tax credit, while the subsidy based on hourly wages would require no filing or administrative effort by workers. We compare and contrast the costs and benefits of these two approaches to raising wages. Our two policy options are meant as part of a response to the sluggish income growth at the bottom of the distribution over the past several decades. Over the long term, a broad set of policies is needed to boost productivity and ensure that the resulting incomes gains are widely shared—and we discuss the elements of such an agenda that should receive bipartisan support. Over the near-term, however, the policies we propose are well-targeted to improving the incomes and participation rate of workers at the bottom who have been left behind by the rising prosperity of the U.S. economy.