× Expand M. Spencer Green/AP Photo Personal care and home health aide wages, on average about $11.00 per hour, only rose by 37 cents an hour from 2007 to 2017.

The Earned Income Tax Credit is widely praised. A subsidy paid to low-wage workers depending on family size, the EITC expands labor force participation and increases income to families, which helps stabilize them. It helps working-poor women to become economically engaged, and improves the life chances of their children by keeping them in school, providing better food, and even increasing their vocabulary.

It is one of the few policies on which Democrats and Republicans agree. Democrats like it because it puts more money in the pockets of the poor. Republicans like it because it rewards the so-called virtuous poor who work, and because government’s involvement is minimal. From a modest start in 1975, in 2018 some25 million eligible workers and families received approximately $63 billion in EITC credits. The average federal EITC subsidy received nationwide was about $2,488, which is almost 17 percent of the annual salary of a full-time worker earning the federal minimum wage. In addition, 29 states and the District of Columbia have supplements to the federal EITC.

Researchers also like it. Economists Hilary Hoynes of the University of California, Berkeley, and Ankur Patel at the U.S. Treasury found that a $1,000 increase in the EITC led to a 9.4 percentage point reduction in the share of families with after-tax-and-transfer income in poverty. Furthermore, economists Gordon B. Dahl and Lance Lochner estimate the impact of changes in family income resulting from the EITC expansions on child cognitive achievements and conclude that a $1,000 increase in income raises combined math and reading test scores by 6 percent. This evidence points to the EITC working exactly as it should: encouraging work, while lifting eligible workers (especially single parents) out of poverty.

But there is an important economic effect of the EITC that enthusiasts tend to miss. The EITC is effectively a subsidy to low-wage employers, who are able to attract workers at lower wages than they otherwise would have to pay. Though some workers are partly compensated by the government via the EITC, workers who don't qualify end up with reduced wages. The heavy reliance on the EITC, rather than the minimum wage and the strength of trade unions, is one major reason why the U.S. leads the OECD in the share of jobs that pay poverty wages—a full 25.3 percent of jobs are poverty jobs, compared to 3 percent of jobs in Norway.

The EITC, in sum, puts downward pressure on wages. That pressure is worse in sectors where many workers are not covered. The EITC excludes older workers and many workers without children, as well as undocumented migrants. The EITC available to workers without children and to noncustodial parents is small and phases out at very low incomes: The income limit for single individuals is just $15,270, and for married couples filing jointly it is only $20,950. The effects are especially pronounced in the rapidly increasing personal and home health-care sector and the non-EITC workers in that sector.

The two complementary policies we need are a higher minimum wage and stronger unions. Merely expanding the EITC will continue to subsidize low-wage employers and drive down market wages. Indeed, there is no bigger supporter of the EITC than low-wage employers. For instance, the Walmart Foundation funds nonprofit organizations such as the United Way and One Economy to expand EITC outreach.

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The EITC ostensibly goes to low-paid workers' households, but low-wage employers capture significant economic benefits. The logic is easy to understand: If farmers are subsidized by the government to grow green beans, there will be more green beans. If the government subsidizes low-paid jobs, there will be more low-paid jobs. The EITC benefits employers who pay low wages because they can pay lower wages but still attract and retain the same number and quality of workers. Also, if the EITC encourages more people (mostly single women with children) to work, then the expansion of the labor supply will actually lower wages in sectors that have a high percentage of EITC recipients.

Childless workers above 65 years old or below 25 years of age are ineligible to receive the credit. This means that the effect of the EITC will differ between two people working side by side, doing the same work. The one who is not eligible will get lower pay but not the supplement.

The EITC is paid for by taxpayers and the EITC check is sent to workers. Thus it would seem workers keep all of the EITC. But economic dynamics occurring behind the scenes steer benefits to employers. First, employers get a benefit from the EITC because the employer doesn't have to raise wages to get more workers. Second, the subsidy potentially allows employers to lower wages and not lose workers because taxpayers are picking up the tab. And third, since the EITC draws in more people to the labor force because taxpayers subsidize the wage, the employer can lower wages and still attract workers.

How much the employer can suppress wages for every dollar of the EITC depends on local conditions. If work is scarce and household members have few employers to choose from—say there is a large nursing-home facility in a small town—the employer has more bargaining power and most of the EITC goes to the employer indirectly through lower wages and higher profits.

Following this same line of reasoning, and taking into account differentiated labor supply and different tax rates across demographic groups, economist Jesse Rothstein estimated that on net, the EITC achieves only 28 cents of redistribution toward low-income individuals for every dollar of EITC. Therefore, the EITC is far from an ideal redistributive policy.

Dynamics in the personal and home health-care sector is a worrisome example of how the EITC makes working in a low-wage occupation worse for a significant share of workers in that sector. Personal and home health care are large, growing, and staffed by low-paid older women workers doing some of the most vital work in society. Personal care and home health aide wages, on average about $11.00 per hour, only rose by 37 cents an hour from 2007 to 2017.

Workers in these occupations have only seen a 1 percent increase in their wages over 10 years compared to the average of a 2 percent annual increase for all occupations. In these two occupations, just 17.3 percent of older workers receive EITC benefits compared to 33.2 percent of workers under the age of 55. The fact that the share of younger workers who receive benefits is considerably higher puts more pressure on older workers' wages in an occupation that is already low-paid and has seen barely any wage growth during the last decade.

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For example, home health aide and personal-care workers are projected to grow by almost 1.4 million workers, and currently about 30 percent of workers receive EITC benefits. Food services will grow by 900,000 employees, and currently 20 percent of workers are claiming the EITC. Most of these occupations are heavily staffed with female workers. When the EITC is introduced or expanded, the immediate impact is an increase in the labor force participation rate of single mothers. So as the supply of female workers increases as a result of the EITC benefits, there will be more downward pressure on wages, which will eventually lead to lower compensation for ineligible workers employed in these majority-female occupations.

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Research by economist Andrew Leigh and a working paper by one of the authors of this article, Aida Farmand, use state-by-state comparisons to show how wage growth is affected by low-wage supplements. EITC supplements differ by state—in general, California has the most generous EITC supplement, Oklahoma the smallest based on dollars refunded, and some states have nothing at all. Generous states are defined as states that offer a refundable add-on credit greater than 20 percent of the federal credit. State EITCs build on the federal credit to enhance the benefits for eligible workers. If ineligible workers suffer wage loss from the net increase in labor supply from eligible individuals, we expect to see a more pronounced dampening effect on wage growth in states that have more generous state-based EITC supplements.

Paradoxically, we expect to see more wage growth in states with no or a small EITC for ineligible older low-paid workers (55+) compared to older workers in states with larger state-based EITC supplements.

The results do indicate that older workers' wages (adjusted for inflation) who live and work in non-EITC-generous states increased almost 1 percent per year from 1991 to 2017, compared to the 0.6 percent inflation-adjusted wage growth of older ineligible workers who worked in generous states. This difference in wage growth clearly indicates the negative impacts of the credit on a vulnerable population—low-paid older workers who are largely ineligible to receive the credit.

In a good-hearted effort to expand the EITC, Ohio Senator Sherrod Brown has introduced legislation called the Working Families Tax Relief Act that would expand a tax credit for low- and middle-income individuals and families. The bill aims to broaden the EITC, which allows qualifying workers to claim a bigger refund. It calls for lowering the minimum age to qualify for the EITC from 25 to 19 and increasing the credit for workers with children by about 25 percent. Additionally, Senate Budget Committee Ranking Member Patty Murray had proposed another bill that would significantly boost the credit for low-wage workers not raising minor children. But legislation such as this will stop short of its goals unless companion measures are enacted to increase the minimum wage and expand union rights.

Although a more robust EITC for childless workers would increase work incentives, these expansions are unlikely to prevent the expansion of low-paid jobs due to the subsidy that benefits the employers. In short, expanding the EITC without adding other measures to raise wages directly, such as stronger unions and higher minimum wages, would be a policy blunder.