In its most recent study, the Congressional Budget Office (CBO) estimated that in the event of an increase in the minimum wage to $15 an hour, by June 2025 about 900,000 people would be lifted out of poverty, but that would come at the cost of a loss of 1,400,000 jobs.
According to the CBO, the least skilled people would be the hardest hit by the minimum wage hike stating that “Young, less educated people would account for a disproportionate share of those reductions in employment.”
The Joe Biden-Kamala Harris administration, along with the Democratic caucus, is looking to introduce legislation that would increase the minimum wage to $15 an hour this year, doubling the established federal minimum wage of $7.25 an hour. President Biden acknowledged that while he included the minimum wage increase proposal in his stimulus plan, he does not believe it will be included in the stimulus package that Congress ultimately approves.
It should be noted that the CBO estimates a gradual increase in the minimum wage to $15 an hour to be effective by 2025, while President Biden proposes to double the minimum wage outright this year, so the effects of doubling the minimum wage have not been estimated and could be much greater than the effects contemplated in the study.
The effects of the minimum wage, according to the CBO
Although the CBO finds an effect on poverty reduction on account of the minimum wage increase, the loss of more jobs is enough to dissuade moderate Democrats and Republicans from supporting an increase in the minimum as the Biden-Harris formula and the more progressive wing of the Democratic Party want.
In addition, according to the CBO, the cumulative effect on the budget deficit for 2021-2031 would be an increase of $54 billion, as spending would increase in items such as unemployment compensation, while decreasing in others, such as spending on nutrition assistance programs. Despite the cost of the minimum wage hike, its impact on the federal budget is relatively low compared to the more than $3.1 trillion deficit at the close of fiscal year 2020.
From 2021 through 2031, the cumulative payout to thousands of people on account of a wage increase would increase by more than $333 billion. However, the CBO also notes that businesses would see a substantial increase in labor costs, which would deter many from expanding their hiring.
The minimum wage hike would also significantly increase labor costs for the largest health care programs, as the CBO estimates that by 2025 there will be about 3,000,000 health care workers earning less than $15 an hour.
“Employers would consequently produce fewer goods and services, and as a result, they would tend to reduce their employment of workers at all wage levels”
According to CBO’s model, although health care costs in Medicaid would be reduced for those people who see their wages increase, the net effect would be negative, as it would increase care costs for more than the 1 million people who lost their jobs because of the minimum wage hike.
Not only would healthcare see an increase in prices, but also products in low-skill labor-intensive industries, such as fast food and retail, where the owners of these businesses, in order to cover the minimum wage hike, would pass these costs on to the customer, depending on the elasticity of the product they offer – elasticity being understood as the consumer’s willingness to pay more for a good or service.