CBO Puts In Its Two Cents in Debate on Federal $15 Minimum Wage

Upon examining the views of the Democratic candidates for the 2020 presidential election, we could find a number of differences. There is one issue where there is near unanimity: raising the federal minimum wage to $15. The Congressional Budget Office (CBO) brought this issue to the forefront of the news cycle by releasing its analysis on Monday regarding a $15 federal minimum wage and its effects. This is not the first time the CBO has conducted such research. In 2014, it came out with an analysis on what raising the minimum wage to $10.10 an hour would look like (see my analysis of that CBO report here). The federal government has not raised the minimum wage since the last CBO report; it still remains at $7.25 an hour. If passed, this new minimum wage increase would gradually increase to $15 by 2025. What did the new CBO report find with regards to what it would be like to raise the minimum wage?

The condensed version is above, but let's get into some of the details of the report...

• Effects on Income and Wages. By design, a major part of the premise of minimum wage is giving people an increase in their wages. The CBO found that 17 million workers would experience an increase in their wages (p. 1). 
• Per its supplementary data (Figure 4), the average wage increase is 21.2 percent (or $2.68). For those below the poverty threshold, it would mean an annual household income increase of 5.3 percent (p. 15). The discrepancy between the individual wage increase versus the household increase is due to the fact that many low-wage workers are in high-income households. 42 percent of low-wage workers live in households three times or more above the poverty threshold. Only 12 percent live in low-income households (p. 10).
• In net terms (including real income for employees, employers, and consumers), a $15 minimum wage would decrease net income by $8.1 billion annually (p. 3, 15). 
• Effects on Poverty Level. For those who have their wages increased, real income for the household increases, as well. The CBO puts the 2025 poverty level at $20,480 for a family of three, and $26,330 for a family of four.  If the proposed minimum wage increase passes, it would bring 1.3 million people out of poverty (p. 3). 
• Effects on Employment. With every policy comes a tradeoff. For raising the minimum wage, the tradeoff is 1.3 million unemployed, which would translate into a 0.8 percent reduction in overall employment (p. 2), as well as a 7 percent drop in employment for directly affected workers (p. 12).What this means is that for every person who escapes poverty under the minimum wage hike, a low-income individual loses their job and has even greater difficulty finding a job. 
• Effects on Consumer Prices. In response to the increase in labor costs, one of the ways that respond to the costs is by passing the cost of minimum wage to the consumer through higher prices of the good or service (p. 9). 

Yes, minimum wage does help some escape poverty. The CBO estimates that it would be 1.3 million that would escape poverty with a $15 minimum wage. But the CBO also estimates that approximately the same amount of people would lose their jobs, thereby being further trapped in poverty. On top of that, it costs $8.1 billion a year, thereby implying that minimum wage is not a stimulus of economic growth. Additionally, the minimum wage doesn't even properly target low-income households. Ultimately, the CBO report confirms that the minimum wage is far from alleviating poverty in this country, and if anything, causes harm to those who are not lucky to keep their job. We, as a country, can do better in helping the poor.


7-24-2019 Addendum: The Foundation for Freedom Education (FEE) had an interesting article on minimum wage and some empirical evidence on it. It highlights four additional was employers respond to minimum wage laws aside from laying off workers. Another way of saying this is that even if a low-wage worker still keeps their job, they could still either have their hours cut, work their employees harder, cut benefits, or hire less workers and turn to automation.