Minimum Wage

CBO report shows $15 federal minimum wage would hurt US economy

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A $15 federal minimum wage would wipe out 1.3 million low-income jobs and boost the wages of at least 17 million workers, according to a report released earlier this month from the Congressional Budget Office (CBO), Congress’s non-partisan number-crunching arm. Overall, one worker would get a pink slip for every 13 people getting a pay raise.

Ever since a landmark 1992 study challenged the conventional wisdom that higher minimum wages reduce employment, the effect of minimum wages has been one of the most closely examined topics in all of labor economics. With so many dueling papers in the literature, CBO’s pronouncements are noteworthy because of the technical rigor of their analysis and the breadth of research that informs their modeling. In a field fraught with uncertainty and data limitations, one can reasonably take CBO’s estimates to be the most accurate possible.

Sharply higher labor costs in low-wage industries like retail trade and food services would shrink business profits and raise consumer prices. In the aftermath of a higher minimum wage — especially one as high as $15 — “real income is also reduced for nearly all people because increases in the prices of goods and services weaken families’ purchasing power.” 

One of CBO’s most important findings is that only 12 percent of low-wage workers (defined as those earning less than $19 per hour) belong to families living in poverty. As I’ve noted in a previous Maine Wire article, much of the low-wage labor force is made up of teenagers and young adults living in middle-class households and older second or third earners supplementing a partner’s income. That’s why, even though at least 17 million workers would benefit from a $15 minimum wage, according to CBO’s analysis, only 1.3 million people would be lifted out of poverty.

When all of the effects are considered — including higher wages for some, joblessness for others, higher prices for virtually everyone, etc — CBO estimates that a $15 minimum wage would transfer $7.7 billion to families below the poverty line ($25,750 for a family of four), raising their income by an average of 5.3 percent.

Families between 100 and 300 percent of the poverty line (up to about $77,000 for a family of four) would gain $14.2 billion. But families above 300 percent of the poverty line would collectively lose $30.5 billion, meaning that the policy would generate $8.6 billion in deadweight loss — value that vanishes from the economy. 

Essentially, a $15 minimum wage would take $30.5 billion from the middle-class and high-income families and distribute $21.9 billion to low-income families (only a third of whom are poor), while destroying 1.3 million entry-level jobs. Workers with the least education and those with disabilities would be disproportionately harmed, since they would be the first to be let go or never hired in the first place.

CBO’s study starkly illustrates a reality that advocates of a $15 minimum wage are often unwilling to acknowledge: While such a policy unquestionably helps many struggling workers, its benefits are poorly targeted toward low-income families, thus making it harder for low-skill workers to find jobs, and its distortionary effects on the economy result in significant deadweight losses that benefit no one.

About Liam Sigaud

Liam Sigaud is a former policy analyst at The Maine Heritage Policy Center. A native of Rockland, Maine, he holds a B.A. in Biology from the University of Maine at Augusta and has studied policy analysis and economics at the Muskie School of Public Service at the University of Southern Maine. He can be reached by email at liam.sigaud@maine.edu.

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