IT MAY or may not be possible, under Senate rules, for Democrats to pass a $15 minimum wage in the next economic support package, as Senate Budget Committee Chairman Bernie Sanders (I-Vt.) urges. If the new majority in Washington wants to make policy according to objective economic research, however, it will reconsider the Sanders-led “Fight for $15.”
We do not say this to oppose an increase in the federal minimum, which has been $7.25 since 2009, and is therefore declining in real terms. Rather, we are responding to the latest analysis by the Congressional Budget Office, which confirms that the bill under discussion would impose significant costs on low-income Americans, despite undeniable benefits.
First, the upside: If the hourly minimum more than doubled through annual increments between June 1, 2021, and June 1, 2025, as the bill provides, 900,000 people would be lifted out of poverty while as many as 27 million workers, including 17 million currently making less than $15 an hour and 10 million already receiving that much or more, would get paid more. The downside, though, is that employment would fall by 1.4 million, with losses concentrated among young, low-skilled workers. By 2025, half of the 1.4 million would have dropped out of the labor force, the CBO notes. Taking into account the full range of revenue and spending effects, the $15 minimum bill would increase federal deficits $54 billion over 10 years, not including interest. This is contrary to predictions that a higher minimum saves the government money because increased wages reduce demand for nutrition assistance and other means-tested benefits.
These risks are not surprising considering that the Sanders-backed proposal would create a structural increase in the cost of low-skilled labor, which, other things being equal, encourages employers to use less of it, including through automation. The bill does so very rapidly and to an unprecedented level, likely well above the all-time high for the minimum wage of 52 percent of the median national wage set in 1968, given the outlook for hourly wages. (For reference, the May 2019 national median was about $19.15 per hour.)
Fortunately, it should not be difficult to craft a minimum-wage proposal that maximizes the benefits while minimizing the costs — bearing in mind that low-income people will face the latter as well as the former. One option would be to stretch out the scheduled increase to $15 over a longer period, such as 10 years, before indexing the minimum to national median wages, as the bill also provides — a sound idea that would help end constant political battles over increasing the minimum wage. Also worth considering are proposals that would calibrate the minimum wage based on regional economic factors. The earned-income tax credit, a federal wage supplement, delivers poverty reduction for working families without the minimum wage’s potential for discouraging hiring; it should be expanded, as Democrats have suggested.
Advocates of a higher minimum have won legislative and referendum battles in many states and cities, such that a significant majority of the U.S. population is already legally entitled to more than $7.25 per hour. This fact, coupled with the CBO’s analysis, suggests that Congress should proceed to a new minimum wage — but with caution.