A call to mandate higher wages has once again stirred an old debate, and a government report has given both sides new fodder for their arguments.
Those who support the move to raise the federal minimum wage to $15 an hour believe it will lift many people out of poverty by putting more income in their pockets. Workers have more spending power, which will benefit local economies.
However, business owners and trade groups that represent them claim hiking the federal minimum wage to this level will hurt companies financially. They’ll need to cut jobs, pay other workers less money and raise prices to make up the additional revenue required.
Oddly enough, a report released Feb. 8 by the Congressional Budget Office confirms key portions of these contrasting viewpoints. The nonpartisan agency examined this issue as a result of a proposal to implement a series of hikes to the federal minimum wage over the next five years.
President Joe Biden and congressional Democrats want to see the federal minimum wage go up from its current level of $7.25 an hour to $15 an hour in stages by 2025. Speaker Nancy Pelosi said Feb. 11 that the Raise the Wage Act of 2021 would be part of the $1.9 trillion novel coronavirus relief package the U.S. House of Representatives sends to the Senate for consideration.
In its report, the CBO said that low-income earners would receive higher wages. But this would come with consequences.
“From 2021 to 2031, the cumulative pay of affected people would increase, on net, by $333 billion — an increased labor cost for firms considerably larger than the net effect on the budget deficit during that period. That net increase would result from higher pay ($509 billion) for people who were employed at higher hourly wages under the bill, offset by lower pay ($175 billion) because of reduced employment under the bill,” according to the report. “The cumulative budget deficit over the 2021–2031 period would increase by $54 billion. Increases in annual deficits would be smaller before 2025, as the minimum wage increases were being phased in, than in later years. Higher prices for goods and services — stemming from the higher wages of workers paid at or near the minimum wage, such as those providing long-term health care — would contribute to increases in federal spending. Changes in employment and in the distribution of income would increase spending for some programs (such as unemployment compensation), reduce spending for others (such as nutrition programs) and boost federal revenues (on net).”
The CBO report states that raising the federal minimum wage to $15 an hour by 2025 would cost 1.4 million Americans their jobs. But at the same time, the number of people in poverty would decline by 0.9%.
Optimists tout the notion that higher wages would soften the blow to the U.S. economy. When people make more money, they spend more money; this will help businesses. Proponents of this plan also highlight examples of areas across the country where higher minimum wages have not reduced employment.
The problem is that these assertions overlook some significant factors.
Yes, there are regions that have successfully raised the minimum wage without impairing local economies. This is a credit to policymakers, entrepreneurs and consumers in these areas.
But these individual sections of the country are in a better position to absorb the costs of higher wages; the same cannot be said of other regions. So to state that a federal minimum wage increase won’t hurt certain areas is shortsighted.
The CBO estimates of how higher wages will benefit low-income workers and those in poverty depend upon current conditions remaining stable for a period of time. But if other events affect the economy adversely, things will deteriorate. And if they do, companies won’t have the revenue to sustain higher wages.
“The cumulative budget deficit over the 2021-2031 period would increase by $54 billion,” according to the report. “Increases in annual deficits would be smaller before 2025, as the minimum wage increases were being phased in, than in later years. Higher prices for goods and services — stemming from the higher wages of workers paid at or near the minimum wage, such as those providing long-term health care — would contribute to increases in federal spending.”
The CBO said “the deficit estimate presented above does not include increases in net outlays for interest on federal debt (as projected under current law) that would stem from the estimated effects of higher interest rates and changes in inflation under the bill. Those interest costs would add $16 billion to the deficit from 2021 to 2031.”
Would the incremental rise in the minimum wage be enough for many people to offset the increased costs of paying for goods and services?
Probably not. It’s likely that once low-income earners start receiving $15 an hour in five years, they’ll actually need $20 an hour to make ends meet.
We definitely want to see wages increase, particularly for those who need a higher income. But a nationwide, cookie-cutter approach to boosting the paychecks of workers won’t work.
The novel coronavirus pandemic has destabilized the financial condition of numerous businesses. Forcing them to increase their personnel costs will hammer many of them and raise inflation in certain areas.
We need to make it through this health care crisis and allow local consumer markets to guide us on setting wages. Congress should shelve the proposal to increase the federal minimum wage to $15 an hour for the time being.