How Raising the Minimum Wage to $15 Would Impact the Economy
With a new administration in place and new legislation proposed to help those hardest hit by the financial impacts of the pandemic, raising the national minimum wage has become a highly contested topic. While boosting the minimum wage to $15 is designed to help those balancing one or more minimum wage jobs better afford essential expenses, many financial experts argue that this will not only hurt the economy and raise costs of living, but it will topple many small businesses already struggling to stay afloat.
There’s a lot of misinformation circulating about raising the minimum wage, so let’s take a look at exactly what’s being proposed, who this will directly benefit, who this may hurt, and any anticipated results of passing a bill to boost the minimum wage to $15 per hour.
Increasing the federal minimum wage: What we know so far On January 20th, 2021, the White House published what’s now known as Biden’s American Rescue Plan. This policy suggestion is extremely comprehensive, calling for $1.9 trillion in aid to help fight the coronavirus pandemic and provide relief for the hardest hit individuals and communities. Part of this act contains a section on increasing the minimum wage to ease the economic burden on many essential workers who have been in the direct line of fire during the pandemic.
Biden’s plan calls for a standard minimum wage of $15 across the country, which would also provide financial benefits to many essential workers of color who account for 40% of all frontline worker jobs.
- Current state of minimum wage legislation
- The minimum wage debate
- Additional benefits of raising the minimum wage
- How the minimum wage increase would impact tipped earners
- The bottom line
Current state of minimum wage legislation
The $15 minimum wage increase was designed to be a part of the $1.9 trillion coronavirus relief package issued by the White House and Democrats. However, on Thursday, February 25th, the Senate concluded that the minimum wage policy could not be included with the rest of the coronavirus aid package.
Democratic Sen. Finance Committee Chairman Ron Wyden unveiled a workaround for removing the minimum wage proposal from the bill on Friday, February 26th. This plan involves adding legislation to the bill that penalizes big corporations who fail to pay employees less than a determined amount. This plan would also include provisions to discourage outsourcing jobs as a result of the penalty.
This proposal would also incentive small businesses for boosting employee wages in the form of tax credits.
Republican Sens. Mitt Romney and Tom Cotton also revealed their own proposal to raise the federal minimum wage from $7.25 to $10 by 2025.
The minimum wage debate
Since its publication, this proposed policy has drummed up a large amount of support, as well as criticism. Those behind the policy claim that increased wages would positively affect the economy and essential workers. Those against the policy believe higher minimum wages would hurt small businesses, many of which are already suffering, and lead to a higher cost of living which would undermine wage increases.
Which side is right? The truth is, even economic experts are split on how raising the minimum wage will ultimately impact the economy. However, there are broader consensuses reached when reviewing the data and other minimum wage studies.
I’ll run you through some hard facts, analyses, and studies to help understand what raising the minimum wage would actually do to the economy.
Raising the minimum wage to $15/hour is not a new agenda First, let’s go back to before the pandemic, which has clearly impacted the economy and workers overwhelmingly. The call for a higher minimum wage was a major political talking point for years and has been analyzed extensively by top economists.
In 2019, Ben Zipperer, an expert economist at the Economic Policy Institute (EPI), testified before the House of Representatives regarding the need for a minimum wage of $15 per hour. Zipperer noted that the minimum wage has not kept up with economic inflation and built a case for the need to boost wages based on previous data demonstrating little to no negative impact on the economy when the minimum wage was raised.
Key points of this testimony in favor of a higher minimum wage include:
- As of 2019, workers paid $7.25 per hour (the current federal minimum wage) make 29% less than their minimum wage counterparts from 50 years ago. In addition, Zipperer noted that essential workers will need to make at least $15 throughout the country in order to afford a passable standard of living.
- Those making minimum wage are disproportionately women and people of color.
- If the U.S. had passed a $12 minimum wage order in 2018, there would have been $6.2 fewer individuals living in poverty (as of 2019).
- Raising the minimum wage has shown to overwhelmingly benefit the economy and has historically had little downside.
Top arguments against raising the minimum wage
Today, there are three main arguments against increasing the federal minimum wage to $15 per hour.
Raising the minimum wage would cause massive job losses
The CBO (Congressional Budget Office) has estimated that increasing the minimum wage to $15 per hour would result in 1.4 million workers losing their jobs. However, this report isn’t on par with what many other top financial experts predict.
Counterargument: A $15 minimum wage would create new jobs and decrease unemployment rates
Arindrajit Dube, a research associate at the National Bureau of Economic Research and professor of economics at The University of Massachusetts, Amherst has noted that the CBO study is flawed, only reviewing 11 studies of minimum wage effects that are not comprehensive enough to lead to realistic predictions.
After reviewing more recent and thorough studies on this subject, and using the same model by which the CBO analyzes data, Dube estimated that raising the minimum wage to $15 would actually lead to less than 500,000 job losses. Dube also noted that the advantages that come along with increasing the minimum wage would overwhelmingly lead to a more beneficial standard of living for millions of Americans and their families.
Heidi Shierholz, an economist at EPI, has also explained why the CBO’s findings are overstated, particularly since every quarter, 20 percent of minimum (and low wage) workers leave or start a job. If those workers do return to jobs when the minimum wage is raised, they’ll be able to benefit from higher wages.
In states where the minimum wage has already been raised above the federal minimum, including Massachusetts and Washington state, studies also find that increasing wages does not lead to massive job loss. In fact, in Seattle, WA, a $15 minimum wage mandate was issued in 2014, to slowly increase wages to $15 by 2021. Similar efforts have been made in Washington D.C., Chicago, San Francisco, San Jose, and Oakland. As of 2018, the EOI (Economic Opportunity Institute) found the unemployment rate decreased as minimum wages increased.
Verdict on job losses. Economists are not all in agreement on what raising the minimum wage will do to the economy, but some of the most comprehensive studies available have cited that job losses will not be as significant as predicted, and unemployment rates may actually decrease.
Raising the minimum wage would hurt small businesses
Another central argument against minimum wage increases is the impact this would have on small businesses financially. A recent CNBC survey indicated that one-third of small businesses would have to layoff employees to afford this increase.
Counterargument: A $15 minimum wage is good for small businesses
However, the Economic Policy Institute found that when the minimum wage is increased, worker’s increased salaries tend to go right back into the economy, increasing demand which can help small businesses.
Small businesses have also been shown to benefit from paying employees higher wages. According to the Washington Center for Equitable Growth, employee productivity and quality of services boost with wage increases, leading to more profitability for small businesses, which can then often increase the price of their products or services.
It’s also important to note that Biden’s policy would raise the minimum wage to $15 by 2025 — it would not be an overnight increase, but rather a gradual increase over the next four years. This would allow small businesses time to adapt to wage increases.
Zoe Willingham, an economic policy consultant for the Center for American Progress, agrees, stating that “increased demand, booster worker productivity, and reduced employee turnover balance out the increased costs for businesses of raising the minimum wage.”
Verdict on small business impact. Economists are still debating how small businesses will be impacted by a federal wage increase spread over the next four years. While many agree that past findings indicate positive benefits for the majority of businesses (including small businesses), with the pandemic’s impact on small businesses currently, the topic is still a major economic issue that has no clear resolution.
Raising the minimum wage would increase the cost of living
Since the policy to increase the federal minimum wage is designed to help those struggling to afford a general cost of living, the argument that this baseline cost will increase is often cited as a reason not to raise the minimum wage.
Arguments include rising housing costs, which economist Atsushi Yamagishi of Princeton University concludes will inevitably increase as the minimum wage increases (particularly in urban areas). Yamagishi explains that this wage increase would benefit homeowners significantly more than renters, who might be negatively affected by rent increases.
Counterargument: A $15 minimum wage would increase cost of living, but not enough to offset increased wage benefits
While most economists can agree that increasing the minimum wage would lead to higher costs of living, overall the benefits low-wage workers would experience would outweigh slight increases in housing and other goods.
However, a 2017 housing study conducted by the University of Illinois at Urbana-Champaign found that increasing the minimum wage in the state of Illinois would reduce the number of burdened renters and homeowners overall.
On top of this, according to Zillow, home prices have risen by 20% over the past 11 years (as of 2020), yet the federal minimum wage has not budged from $7.25 during this time. Not increasing the minimum wage has already placed an unfair burden on minimum wage workers to afford housing. While it’s difficult to account for how every city’s individual markets will react to wage increases, overall the data shows increasing the minimum wage will positively impact low-income workers when it comes to housing costs.
Food prices also tend to increase when the minimum wage increases, however, these increases are typically minimal, yet impactful enough to accommodate wage increases without negatively impacting low-income earners. Fast food restaurants also increase prices as minimum wages increase, but these increases are also minimal and only slightly impact employees’ wage boosts.
Verdict on cost of living increases. Economists are all on all ends of this debate, but studies conducted in cities that have increased the minimum wage seem to suggest that costs of living increases are minimal compared to the substantial wage increases many low-income earners would experience. Likewise, many costs, such as housing, have been increasing steadily throughout the past decade or more, without wage increases, indicating that boosting the minimum wage should make the cost of living more affordable for millions.
Additional benefits of raising the minimum wage
Boosting the minimum wage to $15 per hour over the next four years is also expected to lead to additional benefits that will begin to offset disproportionate pay rates for people of color and women, including:
- Giving raises to one-third of African Americans and one-quarter of Latinos (roughly $3,500 annual increase per minimum wage worker).
- Benefiting 51% of women between the ages of 25 and 54
- Providing financial assistance to essential workers (60% of the minimum wage workforce)
How the minimum wage increase would impact tipped earners
Currently tipped earners in the United States are required to make at least $2.13 per hour from their employers, with the rest of their wages coming in the form of tips. Many states, however, already require employers with tipped workers to pay a wage much higher than the federally mandated minimum. In fact, only 16 states pay the federal minimum, while all others pay tipped employees higher rates.
Biden’s original plan to increase the minimum wage would also gradually increase the minimum wage for tipped workers, which would help boost salaries of those working tipped jobs, particularly in states that currently do not have higher minimums.
When was the minimum wage last increased?
In 2009, the federal minimum wage was last increased to $7.25 for all covered, nonexempt workers in the United States. The national minimum wage has not increased since then, though since then, 29 states (and Washington D.C.) have increased their minimum wages to a rate higher than the national requirement. Many cities (notably Seattle and Chicago) have also increased wages beyond state requirements.
How would the minimum wage increase impact health care?
Increasing the minimum wage has been linked to health care benefits. Higher wages are linked to increased job satisfaction, which, in turn, has been linked to better health outcomes. Access to health care would also be improved, which could significantly improve workers’ health. In March 2020, 25 percent of workers opted to skip medical care or health insurance because of rising costs. A higher minimum wage could also improve access to healthier foods and activities, as well as make prescriptions more affordable.
How many workers earn less than $15 per hour?
As of 2018, 47.7 million U.S. workers earned less than $15 per hour. Of those earning wages under $15, 22.3 million are deemed essential workers.
Who does raising the minimum wage benefit most?
While many economists agree that increasing the minimum wage would boost the economy and help businesses, wage increases would directly benefit the low-income working-class, primarily made up of women and people of color.
Does raising the minimum wage affect taxes?
Taxpayers should know how increasing the minimum wage is likely to impact them. Overall, taxpayers can expect a minimum wage increase to potentially push them into a higher tax bracket, which might lead to an increase in the amount of taxes paid per year. However, many low-income part-time and full-time workers will see little to no changes in taxes owed but can expect an increase in hourly wages.
The bottom line
Increasing the federal minimum wage has been a highly politicized issue for the past decade, with large support and criticism on both sides of the political spectrum. The 2019 census found that 34 million people are living in poverty, and top economics experts are in agreement that increasing the federal minimum wage would decrease this number.
How the minimum wage increase will impact you personally depends on your current salary and work status. Unemployment numbers are expected to decrease if the minimum wage increases and those in lower-income brackets and even lower middle-class families are expected to experience financial improvement by raising the federal minimum wage to $15. Those in the upper-middle class and the top earners in the country are likely to pay slightly higher taxes if pushed into a higher tax bracket.
Of course, these statistics also vary greatly depending on where you live in the country.
We’ll keep you updated as new developments arise in the push for federal minimum wage increases.