Biden's Federal Minimum Wage of $15 Per Hour Would Be an Economic Mishap

Nobel Prize-winning economist Milton Friedman once said that one of the great mistakes is to judge policies and programs based on intentions and results. When it comes to economic policy, there are way too many on the Left that think that simply by having good intentions makes a prescription of a welfare state or government largesse the correct one. The predominant thinking on the Left is so focused on intent and the process (i.e., government is always the answer) that it makes me facetiously wonder how much the result of actually helping out the poor matters. I have applied this to multiple anti-poverty policies on the Left, but I have found the "intentions matter more than results" argument to especially play out when it comes to minimum wage. 

President Joe Biden has not wasted any time since his inauguration. In addition to his flurry of executive orders, Biden has made a federal minimum wage of $15 per hour one of his major goals (Raise the Wage Act). This past weekend, Biden went as far as saying that "it's economics" that the economy booms if you raise the minimum wage to $15 per hour. 

What ceases to amaze me is how minimum wage proponents ignore the most basic laws of supply and demand. When you have a price floor above the equilibrium point in a given labor market, you create a surplus of labor (also known as unemployment). This is especially true in low-skill labor markets, in which there exists greater elasticity for demand. As we will see shortly, unemployment is one of the major costs of minimum wage laws. At the same time, it is hardly the only cost. Minimum wage laws prolong recessions, ineffectively targets poverty, make it more difficult for low-skilled laborers find work, and increase consumer prices. 

If that is not enough, the Congressional Budget Office [CBO] released its analysis on the proposal of a federal $15 per hour minimum wage yesterday. For those who do not know, the CBO is the gold standard of U.S. legislative research and analysis. This is not the first time the CBO has provided analysis on increasing the minimum wage. You can see my 2019 analysis and 2014 analysis of past CBO reports on the minimum wage. So what did the CBO have to say in its latest report? 

• Effects on poverty. Since the minimum wage is definitionally increasing wages for workers, it would make sense that there are some workers that are no longer in poverty. The CBO estimates that 0.9 million would be lifted out of poverty (p. 9).
• Effects on employment. Higher wages increase the costs for employers. Some of these costs would be passed on in the former of higher prices. This would lead to less consumption, which would affect production. Ultimately, it would mean less money to pay workers their wages. As such, one of the ways that employers compensate for minimum wage costs is to have fewer employers. The CBO estimates that between 2021 and 2025, the federal minimum wage will reduce employment by 1.4 million workers (p. 8). Another way of saying this is "the price of lifting 900,000 Americans out of poverty is to make 1.4 million Americans unemployed." The CBO's finding confirms what much of minimum wage research has to say about its effects on unemployment, especially a recent research paper from the National Bureau of Economic Research (Neumark and Shirley, 2021). 
• Effects on labor force. If it was not bad enough that minimum wage causes 1.4 million people be without a job, half of those who lose their jobs, or 700,000 people, will leave the labor force (p, 7). This effect has the potential to create a significant amount of potentially permanent unemployment individuals. This is all the more tragic considering that minimum wage earners are the ones who need the experience the most in order to ultimately gain better-paying work. 
• Effects on consumer prices and cost of labor. Labor is a major cost to employees. According to the CBO, estimated labor costs are to increase by $333 billion (p. 9). Since wages are a cost of doing business, it follows that consumer prices will increase because it is one of the ways that employers pass on the costs of minimum wage. This is even more true for industries using a disproportionate amount of low-wage labor (p. 10).
• Effects on the budgetary deficit. On the one hand, spending on food stamps [SNAP] would decrease (p. 4), as would the spending on the earned income tax credit and student loans (p. 5). On the other hand, unemployment compensation would increase because there will be more unemployed persons (p. 4). Spending would also rise for Social Security because the average benefits would increase (ibid.). On net, a federal $15 per hour wage would create a budget deficit of $54.1 billion from 2021 to 2031 (p. 17).
• Effects on real output. Raising the minimum wage means a slightly lower GDP. The effects of the unemployment would affect real output since the stock of capital goods would be smaller. Also, investment would be lower, which would lower productivity (p. 10). Any effects increase of consumer demand from lower-income households due to the wage increases would disappear in a few years (p, 10), thereby contributing to lower GDP. 

Postscript: In short, it's not "simple economics" that increasing the minimum wage helps the economy, as President Biden asserts. If it were that simple, why not raise the minimum wage even higher? Why do minimum wage laws not work after one increase? Because we live in a world of scarce resources. The laws of supply and demand exist for a reason. The more the minimum wage deviates from the market value of labor (read: equilibrium point), the more negative the effects, especially on the people it was meant to help. I really wish minimum wage proponents could see the price tag of their good intentions.

For more information, read the Cato Institute's analysis on the Raise the Wage Act here.