Minimum wages, taxes and transfers, and low-income workers
Lead Research Organisation:
Institute for Fiscal Studies
Department Name: IFS Research Team
Abstract
Tackling high rates of inequality and in-work poverty has become central to public policy agendas in many developed countries. Policymakers have often turned to two particular tools: cash transfers (sometimes called 'tax credits') from the government to low income workers or firms that hire them, and minimum wages. But the impacts of these policies, and in particular their role in reducing poverty and increasing living standards, cannot be adequately understood independently from one another. Understanding how these key tools combine, and how their effects are shaped by the wider economic and policy environment, is crucial for building the mix of policies that is best targeted at boosting living standards for low income workers.
This project will seek to enhance our understanding of such policies in several key ways.
First, we will study how providing tax credits to low income workers can affect their wages. Such transfers incentivise more people to work - but that potentially allows employers to reduce the wages they offer. This is of crucial importance - if wages do fall in response to the introduction or expansion of tax credits, that fundamentally undermines their purpose.
Second, we will examine what the relationship between tax credits and wages depends upon. For example, minimum wages provide a floor which wages cannot fall below - so using minimum wages and tax credits together might prove to be an effective way to boost low income workers' living standards. The tax credit-wage relationship might also depend upon the presence of unions, who can strengthen workers' bargaining power; or it might depend upon how many employers there are and thus what kind of bargaining power they have.
Third, we will analyse how tax credits, other tax or transfer policies, and minimum wages work together to affect household incomes. Tax credits have a direct effect on household incomes, but - as discussed already - they might reduce workers' wages. At the same time, they could increase employment, boosting household incomes. Minimum wages can affect not only those actually on the minimum wage, but also those paid a little above as employers raise wages to maintain pay differentials; and they might reduce employment. We will bring together several tools and datasets to comprehensively study the effect of these policies and how they fit together to affect rich and poor households' incomes.
Together, studying these questions will help provide a thorough assessment of the value of tax credits, other tax reforms, and minimum wages - and how they depend on other parts of the economic environment. We will be able to further extend our understanding of these issues by studying them in a parallel way across France, Germany, and the UK. The different settings that these countries provide will allow us to shed light on the institutional arrangements and background conditions that shape the effects of these policies.
This project will seek to enhance our understanding of such policies in several key ways.
First, we will study how providing tax credits to low income workers can affect their wages. Such transfers incentivise more people to work - but that potentially allows employers to reduce the wages they offer. This is of crucial importance - if wages do fall in response to the introduction or expansion of tax credits, that fundamentally undermines their purpose.
Second, we will examine what the relationship between tax credits and wages depends upon. For example, minimum wages provide a floor which wages cannot fall below - so using minimum wages and tax credits together might prove to be an effective way to boost low income workers' living standards. The tax credit-wage relationship might also depend upon the presence of unions, who can strengthen workers' bargaining power; or it might depend upon how many employers there are and thus what kind of bargaining power they have.
Third, we will analyse how tax credits, other tax or transfer policies, and minimum wages work together to affect household incomes. Tax credits have a direct effect on household incomes, but - as discussed already - they might reduce workers' wages. At the same time, they could increase employment, boosting household incomes. Minimum wages can affect not only those actually on the minimum wage, but also those paid a little above as employers raise wages to maintain pay differentials; and they might reduce employment. We will bring together several tools and datasets to comprehensively study the effect of these policies and how they fit together to affect rich and poor households' incomes.
Together, studying these questions will help provide a thorough assessment of the value of tax credits, other tax reforms, and minimum wages - and how they depend on other parts of the economic environment. We will be able to further extend our understanding of these issues by studying them in a parallel way across France, Germany, and the UK. The different settings that these countries provide will allow us to shed light on the institutional arrangements and background conditions that shape the effects of these policies.