Activists, holding copies of Agriculture Department Food Coupons, momentarily block Independence Avenue in Washington, D.C., Thursday, Dec. 5, 2013.

Raising the Minimum Wage Brings Many Benefits

And they significantly outweigh the costs.

Activists, holding copies of Agriculture Department Food Coupons, momentarily block Independence Avenue in Washington, D.C., Thursday, Dec. 5, 2013.

He deserves a raise.

By + More

The typical low-wage worker and low-income family would benefit significantly from a minimum wage increase to $10.10 an hour by 2016, up from the current $7.25, as President Obama and congressional Democrats have proposed. Those are the key finding from the Congressional Budget Office’s recent analysis of how such a minimum wage hike would affect employment and family income — and the key reasons why lawmakers should enact it.

CBO’s analysis accounts for a broad range of effects of this wage hike on employment and family incomes. First, of course, the increase would boost the family income of low-wage workers. At the same time, employers facing a higher minimum wage might demand less labor, leading to more joblessness and lost income in families with low-wage workers. Employers could take some of the higher labor costs out of profits, thus absorbing the hit themselves. Employers also would pass along some of the higher labor costs to consumers in the form of higher prices, reducing their purchasing power.

For low-income families as a group, CBO finds that the gains greatly outweigh the costs. In particular, a minimum wage hike to $10.10 would raise average family incomes below the poverty line by 2.8 percent and cut the number of people living in poverty by 900,000 (see chart). Average net gains shrink and eventually turn into losses as one moves up the income scale and there are fewer low-wage workers. Nevertheless, CBO estimates that a minimum wage boost to $10.10 would raise average income for families up to three times the poverty line (which CBO projects would be $72,300 for a family of four in 2016) and not start shrinking income until six times the poverty line (roughly $145,000 for a family of four).

[See a collection of political cartoons on the economy.]

The highest income families (at least six times the poverty level) have few low-wage workers (9 percent of the total, according to CBO). For them, the costs from the loss of business income and purchasing power are larger than any boost to incomes from the higher minimum wage. High-income families have received disproportionate gains from economic growth since the 1970s, and increasing the minimum wage would offset some of that substantial rise in inequality.

While the net benefits of a minimum wage increase strongly outweigh the costs for low-wage workers and low- and moderate-income families, there are some costs that could affect particular workers and their families disproportionately. In particular, CBO estimates that, when fully implemented, a boost to $10.10 would reduce total employment by 500,000 jobs in the second half of 2016, with a range of uncertainty of plus or minus 500,000 jobs around that estimate.

Unlike the job losses CBO found in its analysis of health reform that I discussed here previously, these are real job losses arising from employer decisions to reduce employment in the face of higher labor costs. As my CBPP colleague Jared Bernstein and others have noted, however, CBO derives its job-loss estimate from an extensive economic literature on the minimum wage in which some of the best studies find negligible job losses or certainly job losses in the lower half of CBO’s range.

[Read more on increasing the federal minimum wage.]

For the moment, let’s accept CBO’s figures. The budget office finds that under current law, an estimated 17 million people would be making less than $10.10 in the second half of 2016. Under the proposed increase, 16.5 million of them would have higher incomes and a half million of them (3 percent) would be jobless. 

If the same half million people were always unemployed, that would be a serious equity concern to weigh against the average net gains to low- and moderate-income families. But in the highly volatile low-wage job market, many people regularly move between having a job and looking for one. More plausibly, therefore, the increase in the minimum wage would mean that a large number of low-wage workers would experience income losses from slightly longer unemployment spells — and that those losses would be more than offset by earning a higher wage when working.

Raising the minimum wage to $10.10 is sound policy: it increases the reward for work among low- and moderate income households struggling to make ends meet and spreads the modest costs of doing so broadly in proportion to families’ ability to pay.