At 2:00 AM on Saturday, February 27, Democrats in the U.S. House of Representatives voted to pass a \”COVID relief and economic support” bill at a cost to taxpayers of $1.9 trillion. The following Saturday, Senate Democrats passed a really similar bill, and President Biden stated he'll sign it. This will be the sixth \”COVID relief\” law and swell the tab for such legislation to some total of $5.3 trillion. The combined price of these laws to every household in the United States will be an average of $41,036.
The House bill also contained a provision to double the federal minimum wage from $7.25 to $15.00 an hour or so. The Senate rejected this for the time being, but given that 97% of Congressional Democrats voted with this, it will likely be back on the agenda soon.
Proponents of raising the minimum wage to $15/hour often claim that any economic harm out of this would be minimal compared to the law's benefit of \”lifting nearly a million people from poverty.\” That stylized statistic – which is derived from a recent Congressional Budget Office analysis – is grossly misleading because CBO has estimated that the law would raise the average total income of families below the poverty line by about $589 annually or merely 1%. This increase is all about half of what they spend on sweetened drinks, desserts and candy.
CBO's estimated tradeoffs with this 1% rise in income include the destruction of 1.4 million jobs, a small decline in the overall economy, increased inflation, more government debt, and greater burdens on taxpayers.
One of the biggest concepts in economics is weighing costs and benefits. Failing to do this can make virtually any policy seem positive or negative.
CBO is clear that minimum wage analyses \”are uncertain, and there's a wide range of possible outcomes on each side of the estimates shown within this report.\” This is the case with most government policies because numerous factors can impact economic and societal outcomes, and there's frequently no objective method to isolate and quantify the results of a single factor like the minimum wage.
Lifting People Out of Poverty
Politicians, commentators, and journalists often say that raising the minimum wage to $15/hour would \”lift almost a million people out of poverty.\” Such proclamations come in articles by CBS, NPR, PBS, Reuters, The Washington Post, Vox, and ABC News, as well as commentaries published by Time, Rolling Stone, and also the Los Angeles Times, and statements by the AFL-CIO, Bernie Sanders, and Ilhan Omar.
That narrative is rooted in a recent analysis by the Congressional Budget Office which estimated that raising the minimum wage to $15/hour would reduce the number of people living below the poverty line by 0.9 million. Contrary to the phrase \”lifting people out of poverty,\” this doesn't necessarily involve a dramatic alternation in their finances. It only means they will receive at least a little more compared to official federal poverty thresholds.
For example, a single parent with two children along with a yearly income of $20,000 could be \”lifted out of poverty\” if their reported cash income rose above $20,852 – the federal poverty threshold for this family structure.
That slight bump in income is typical of what the law would accomplish because CBO estimated in July 2021 that raising the minimum wage to $15/hour \”would increase real family income\” of \”families under the poverty line\” by \”an average of $600 each year.\” Several months later, CBO revised this to $589.
How can their income rise by only $589 given that a full-time worker who receives a raise from $7.25 to $15 an hour will receive an extra $15,500 in wages per year? One of the main reasons is that the vast bulk of people in poverty work very little or not at all. In fact, only 27% of adults in poverty during 2021 were within the labor force for at least half of the year. This includes part-time workers and those who were simply looking for work.
Consequently, CBO estimates that increasing the minimum wage to $15/hour would give 81% of the resultant wage increases to families who were already above the poverty line.
Moreover, an extra $589 per year is merely 1% of the average total salary of households in poverty. It is because their real incomes are several times greater than commonly reported. The state poverty/income statistics – published by the Census Bureau and widely used by governments and media outlets – exclude a vast array of goods and services that poor people receive from governments and charities. Thus, they ignore the following realities:
- Food Stamp beneficiaries received an average of $3,096 per household in Food Stamps during 2021.
- Medicaid beneficiaries received an average of $7,816 per person in health benefits during 2021.
- Section 8 voucher beneficiaries received typically $8,586 per household in rental assistance during 2021.
- Head Start beneficiaries received typically $11,417 per child in childcare and preschool benefits during 2021.
- Other government programs provide utility assistance, college grants, school lunch, school breakfast, community health centers, family planning services, prescription drugs, job training, legal services, cell phones, cell phone service, and internet service.
- U.S. citizens donate about $50 billion each year to charities that provide \”direct services to people in need\” – an average of $1,471 for every person who is reportedly below the poverty line.
- A 2021 paper in the Journal of Economic Perspectives found that \”more than half of welfare dollars\” were unreported \”in several major surveys\” that the government uses to determine poverty rates and other economic statistics \”used to allocate government funds.\”
- In 2021, the IRS estimated that 55% of all income not reported to the IRS by third parties is never reported to the IRS by the people who receive the money.
- In 2021, the chief actuary of the U.S. Social Security Administration estimated that 3.9 million illegal immigrants worked \”in the underground economy\” during 2010.
- Federal law requires most hospitals with emergency departments to provide an \”examination\” and \”stabilizing treatment\” for anyone who involves such a facility and requests take care of an emergency medical condition or childbirth, regardless of their ability to pay and immigration status.
All told, the poorest 20% of U.S. households consumed an average of $57,049 of goods and services in 2010 , while reporting only $11,034 in pre-tax cash income. That last figure can be used to determine the official poverty rate, however the first one represents their total income – and $589 amounts to only 1% of it.
For perspective, $589 is about half of what households who receive Food Stamps spend per year on average for sweetened drinks, desserts, and candy. This isn't nearly enough to truly lift anyone out of poverty.
In fact, economic development in 2021 raised the reported cash incomes of four.2 million people above the federal poverty thresholds . This occurred during a single year of prosperity and it is 4.7 times greater than the 0.9 million individuals who would supposedly be \”lifted out of poverty\” by doubling the minimum wage.
Another reason the average income increase from doubling the minimum wage is so low is that CBO estimates the law would destroy 1.4 million jobs. It is because \”when the cost of employing low-wage workers rises,\” some employers will replace all of them with machinery, technology, and higher-wage workers.
This is basic economics. When the prices of goods and services rise , people have a tendency to purchase less of them.
CBO notes you will find \”some limited circumstances\” where \”increasing the minimum wage could boost employment if employers\” have something called \”monopsony power.\” However, such situations are the exception, not the rule.
At the current minimum wage, employers would lose money if they fired two $7.50/hour low-skill employees and replaced them with one $25/hour employee who performs exactly the same work as the two of them combined. However, if the government forces employers to pay for these two low-skill workers $15/hour, employers will save money by replacing each of them with the one worker who is more productive.
Hence, CBO finds that \”young, less educated people would account for a disproportionate share of those reductions in employment.\” CBO also estimates that by 2025 \”half of the 1.4 million people who would be jobless because of the bill might have dropped out of the labor force.\”
In what of Ph.D. economists Don Boudreaux and Walter Williams, this disparate impact on young and less educated people helps make the long-term consequences of the minimum wage even \”more dire\” because \”the climb to higher wages begins for most workers during their teenage years with entry-level jobs.\” As a result, raising the minimum wage saws \”off the underside rungs of the economic ladder\” leaving inexperienced workers \”unskilled and unemployed for that indefinite future.\”
For decades, some people have alleged that newer minimum wage studies typically find no damaging impacts on employment. This claim was debunked with a 2007 paper in the journal Foundations and Trends in Microeconomics. Per the paper, which was written by Ph.D. labor economists David Neumark and William Wascher:
- The \”oft-stated assertion that the new minimum wage research does not support the conclusion that the minimum wage reduces the employment of low-skilled workers is clearly incorrect.\”
- Nearly two thirds of 102 studies examined within the paper \”give a relatively consistent indication of negative employment effects of minimum wages.\”
- When \”researchers focus on the least-skilled groups that appears to be adversely affected by minimum wages,\” the negative impact on employment \”seems especially strong.\”
A 2021 paper by the same scholars and Ph.D. labor economist Ian Salas goes into great detail about the flaws of studies that conclude the minimum wage doesn't destroy jobs.
Beyond the direct impacts on poor and young people, CBO also estimates that raising the minimum wage to $15/hour \”would increase the cost to employers of manufacturing goods and services,\” and this would increase consumer prices, thus leading customers to purchase fewer goods and services and reducing \”employment of workers at all wage levels.\”
Due mainly to such job losses, CBO finds that \”raising the minimum wage would slightly reduce real GDP,\” or the nation's inflation-adjusted gross domestic product. This is the standard measure of nations' economic output and has broad implications.
As explained in the textbook Microeconomics for Today, \”GDP per capita provides a general index of a country's standard of living. Countries with low GDP per capita and slow development in GDP per capita are less in a position to satisfy basic needs for food, shelter, clothing, education, and health.\”
The National Debt and Burden on Taxpayers
Progressives declare that raising the minimum wage to $15/hour would cut back dependence on welfare and save taxpayers money. However, the same CBO analysis estimates that this law would cause spending on most social programs to increase and increase the \”cumulative budget deficit over the 2021 -2031 period\” by $54 billion.
This is because raising the minimum wage would boost the prices of goods and services purchased by social programs and make more people jobless. These individuals will end up even more dependent on government, and also the national debt will rise, creating a greater burden on taxpayers.
CBO also estimates that raising the minimum wage to $15/hour \”would change the relative prices of goods and services,\” and especially raise prices \”for goods or services whose production required a larger-than-average share of low-wage work, such as food prepared in restaurants.\” Other prices would rise as well but to a lesser extent.
Simply put, these higher prices mean higher inflation, and that means people will get less goods and services for their money.
CBO finds that greater \”inflation under the bill\” will raise interest costs on the national debt and boost the federal budget deficit by another $16 billion past the $54 billion above.
Minimum wage laws force employers to pay certain employees more than the market rate for their services. The immediate effects of this are obvious: the employees will receive more wages.
However, the prolific economist William A. McEachern warns that it is a \”mistake\” to only consider the immediate results of public policies and \”ignore the secondary effects, or the unintended consequences\” of them. He then emphasizes:
Economic actions have side effects that often turn out to be more important compared to primary effects. Secondary effects may develop slower and may not be immediately obvious, but good economic analysis tries to anticipate them and bring them into account.
By doing that while aptly noting there is room for uncertainty, the Congressional Budget Office has estimated that increasing the federal minimum wage to $15/hour would:
- raise the entire income of households below the poverty line by an average of $589, or roughly 1%.
- lift the income of about 0.9 million people above federal poverty thresholds, or about one-fifth from the 4.2 million people whose incomes rose above those thresholds in 2021.
- destroy about 1.4 million jobs with a disparate impact on young, less educated people.
- slightly reduce the health of the overall economy.
- increase inflation, specifically for goods and services produced by low-income workers.
- increase the nation's debt by about $54 billion plus another $16 billion in added interest costs spurred by inflation.
- place greater burdens on taxpayers.
One of the biggest concepts in economics is weighing costs and benefits. Failing to do this can make virtually any policy seem positive or negative. The facts above – which most and perhaps all media outlets failed to report in full – give a wealth of information to assess the advantages and disadvantages of increasing the minimum wage.