The minimum wage might transfer the benefits of the earned income tax credit to employers

See Minimum logic by Steve Landsburg. 

"The question is often raised: “Why would you ever want to raise the minimum wage when you could raise the earned income tax credit instead?”. In other words, if you’ve got a choice between two ways to increase the effective wage rate, why would you choose the one that reduces employment over the one that increases employment?

Paul Krugman has an answer. He’s argued on numerous occasions that the EITC and the minimum wage are complements, not substitutes — that is, each makes the other more effective. So, according to Krugman, once you’ve raised the EITC, the case for a minimum wage hike becomes stronger, not weaker.

Here’s his argument: When you raise the EITC, more people enter the labor market. The increased supply of labor tends to drive wages down, which transfers some of the benefit from the workers you intended to help to the employers and/or consumers who you presumably care about less. To prevent this perverse consequence, one needs a hike in the minimum wage.

The other day, a colleague (who I’m not naming because I’m not sure whether he’d want to be quoted) pointed out that this argument makes not a shred of sense. Here’s why: Any effective minimum wage (that is, any minimum wage set above the wage rate that would prevail in an unregulated market) suffices to do the job Krugman wants it to do. At best, then, Krugman has made an argument for having some minimum wage, not a case for raising it.
Here’s the picture:


Suppose the minimum wage is set at $5 an hour, just a hair above the unregulated equilibrium. Now we raise the EITC by the amount of the vertical blue line. Ordinarily, this EITC would drive the wage rate down to $3 an hour. But the wage is not allowed to fall below $5 an hour, so workers continue to earn that amount, plus the entire EITC. That is, they earn the amount at the top of the red line (which is the same length as the blue). Had the minimum wage been $6 or $7 or $8 an hour instead of $5 an hour, workers would have pocketed exactly the same 100% of the EITC.

Of course you might want to increase wages still further, and you can do this by increasing the minimum wage, but now you’re right back to the question: “Why would you ever want to raise the minimum wage when you could (further) raise the Earned Income Tax Credit instead?”

Because my sympathies are always with the underdog, I did my best to defend Krugman. Namely: the existing minimum wage of (let’s say) $5 might be effective in some labor markets (where the unregulated equilibrium is $4.50) but not in others (where the unregulated equilibrium is $6). Krugman’s argument is (as shown above) invalid in the first market, but could still carry water in the second. So if you’re constrained to have a single minimum wage that applies to both markets, you might want to raise it to $6.

Of course, even to make this work, you have to ignore a whole lot of economics, including this: If you increase the EITC in a market with an effective minimum wage, you’ll get a whole lot more workers competing for the same limited number of jobs, and this competition must continue until all of the benefits have either been dissipated or transferred to employers, who are now able to demand harder work and offer fewer perquisites. In other words, even if you go out of your way, as I have, to make sense of Krugman’s argument, you still end up with the same ironic bottom line: His stated goal is to prevent the benefits of the EITC from being transferred to employers, and to this end he proposes a policy whose certain effect is — to transfer the benefits of the EITC to employers. It’s almost enough to make you wonder whether he even bothers to give a minute’s thought to this stuff any more."