Raise the Wage… or Not?
Background: In response to the growing income inequality and the severely detrimental effect the COVID-19 pandemic has had on lower-wage workers, the Biden Administration proposed the Raise the Wage Act of 2021, H.R. 603. The act has five main goals: raise the federal minimum wage from $7.25 to $15 by 2025; ensure the value of minimum wage does not erode over time; guarantee tipped workers are paid at least the full federal minimum wage; guarantee teen workers are paid at least the full federal minimum wage and provide opportunities for workers with disabilities to be competitively employed and participate more fully in their communities. The Congressional Budget Office created a comprehensive non-partisan analysis of the potential benefits and harms of the act. While the CBO’s analysis offers numerous insights, it’s not exactly a beach read. This post aims to synthesize the most important aspects of the 16-page report to allow for more accessible readability and understanding.
Potential Benefit: CBO analysis indicates that raising the federal minimum wage to $15 by 2025 would benefit 27 million workers and lead to a 10-year increase in salaries of approximately $333 billion for low-wage workers, many of whom have been the hardest hit due to the pandemic. Second, the report indicates that the federal minimum wage is a powerful policy instrument to redistribute income and bargaining power to low-wage workers. As a result, it has substantial gross fiscal effects on both federal revenue and federal spending. The bill also has the potential to increase tax revenues. The report writes, “revenues would rise in response to increased spending on unemployment insurance, as states increased their tax revenues to maintain a positive balance in their unemployment trust funds.” A higher economy-wide average wage would cause payments to increase by raising the earnings threshold below which workers owe Social Security taxes. Finally, the CBO assumes that most of the increased labor earnings for low-wage workers are paid for by reduced profits and small price increases, the bulk of which are paid by high-income families whose average annual family income is well over $200,000. Thus the CBO’s modeling assumptions show that a higher minimum wage is an effective policy in reversing the generation-long rise in income inequality in the United States. As they note in their analysis: “Although total nominal income would be roughly unchanged in CBO’s estimate, labor income would increase while capital income would decrease. Labor income tends to be more heavily taxed. Income would also shift toward lower-income people and away from higher-income people under the bill.”
Potential Harm: The most considerable harm presented by the CBO is the loss of employment, which they predict to be 1.4 million workers; most of the later disadvantages they offer are direct results of the loss in work. Adverse employment effects resulting from minimum wage increases are well documented in previous CBO analyses and other economic research. CBO’s latest report finds that in response to a minimum wage increase, employers may choose to shift spending toward employing fewer higher-wage workers or investing in technology at the expense of low-wage workers. The drop in employment would be felt most strongly by the youngest and least educated workers. Furthermore, it is estimated that the bill would increase the deficit by $54 billion over 10 years as spending on unemployment compensation, Social Security, and health care programs are expected to increase because of increased unemployment. The increase in federal debt can have numerous detrimental effects due to the increasing interest levels that accompany it. Higher interest costs could crowd out significant public investments that fuel economic growth, such as education, R&D, and infrastructure. Additionally, rising debt means lower incomes and fewer economic opportunities for Americans, which is the very problem H.R 6.0.3 is attempting to solve.
Conclusion: The CBO report offers insight into how a significantly higher minimum wage would impact workers, the economy, and the federal budget. While it finds that an increase in the minimum wage would clearly benefit low-wage workers, it would also price others out of the market, driving up long-term unemployment. It also threatens to drive up prices on goods and services, as well as federal spending.
