CBO analysis confirms that a $15 minimum wage raises earnings of low-wage workers, reduces inequality, and has significant and direct fiscal effects: Large progressive redistribution of income caused by higher minimum wage leads to significant and cross-cutting fiscal effects
This post has been revised slightly as of February 12. Specifically, it refers only to a literature review by Dube (2019) on the employment effects of the minimum wage on the low-wage workforce. It also does not specifically quantify the influence that employment effect assumptions have on the Congressional Budget Office’s estimated budgetary effects, since it is not possible to do that without additional information that is not published in CBO’s report.
Today’s analysis from the Congressional Budget Office (CBO) highlights a number of things that policymakers should keep in mind as they consider minimum wage legislation in the upcoming Congress. First, the benefits of passing a significant increase in the federal minimum wage—like the Raise the Wage Act of 2021—are enormous. Today’s CBO analysis indicates that raising the federal minimum wage to $15 by 2025 would benefit 27 million workers and would lead to a 10-year increase in wages of $333 billion for the low-wage workforce—the same workforce that has borne the brunt of the COVID-19 economic shock and worked in essential jobs that have kept the economy going. In short, given which parts of the workforce have economically suffered the most from the pandemic, it seems more than appropriate to include a minimum wage increase in any relief and rescue package. Second, the federal minimum wage is a powerful policy instrument to redistribute income and bargaining power towards low-wage workers, and as a result it has very large gross fiscal effects on both federal revenue and federal spending.
In our analysis released last week, we highlighted a number of large gross changes to both spending and revenue that were likely to result from the large increase in earnings for low-wage workers if the minimum wage was significantly increased.1 In particular, we estimated that by raising earnings of low-wage workers, a $15 minimum wage by 2025 would significantly reduce spending on Supplemental Nutrition Assistance Program and the Earned Income and Child Tax Credits.2 CBO’s analysis today also estimates outlays would fall for these public assistance programs, as they predict the higher minimum wage would lift nearly 1 million people out of poverty.
CBO also estimates gross changes on the spending and the tax side of the federal budget from both the earnings increase of low-wage workers and assumptions regarding how this earnings increase is “financed.” They find large gross changes that net out to a small increase in budget deficits. These differences in emphasis and bottom-line numbers between independent analyses like ours and the CBO numbers today should not distract from the agreed-upon finding by all analyses of this issue: The effects of a significant increase in the federal minimum wage on the federal budget are large.
There are essentially two main analytical differences between our findings and the CBO’s: CBO models significant job loss due to the minimum wage increase while we do not; and CBO models how the minimum wage increases are “financed” and assumes that a substantial part of this financing occurs through price increases that are mostly paid by those with high incomes and reductions in profits on the part of firms that employ low-wage labor.
We believe that the CBO’s assumptions on the scale of job loss are just wrong and inappropriately inflated relative to what cutting-edge economics literature would indicate. The median employment effect of the minimum wage across studies of low-wage workers is essentially zero, according to a 2019 review of the evidence.3
On the issue of how minimum wage increases are financed, we should note that the CBO’s modeling assumptions indicate that a higher minimum wage is extraordinarily effective in redistributing income from those with very high incomes towards low-wage workers. This is because the CBO assumes that most of the increased labor earnings for low-wage workers are paid for by reduced profits and small price increases, the bulk of which are paid by high-income families whose average annual family income is well over $200,000.4 In short, the CBO’s modeling assumptions—which drive a large part of their finding that higher minimum wages will increase the federal budget deficit—show that a higher minimum wage is extraordinarily effective policy in reversing the generation-long rise in income inequality in the United States. As they note in their analysis: “Although total nominal income would be roughly unchanged in CBO’s estimate, labor income would increase while capital income would decrease. Labor income tends to be more heavily taxed. Income would also shift toward lower-income people and away from higher-income people under the bill.”
The CBO analysis also highlights the multiple significant channels through which a higher minimum wage would affect the federal budget. In looking just at revenues, for example, they note: “The bill would increase revenues, on net, from 2021 to 2031. That net effect would be the result of a number of factors that worked in opposite directions.” Their estimates on the effect of a higher minimum wage on the spending side of the budget includes 14 separate line items. This is, in short, a fiscally significant policy change.
One fiscal impact highlighted by CBO is particularly noteworthy—the cost of boosting pay for care workers whose work is financed by Medicaid. CBO assumes the higher wage costs will translate into higher Medicaid payments through negotiations between providers and state Medicaid agencies. We certainly hope they are right, and, since the costs are already accounted for in the cost estimate, we urge state policymakers to hold Medicaid services constant in the face of higher labor costs. The care workforce provides extraordinarily valuable services yet is among the most underpaid in the economy, due largely to historical legacies of racial and gender discrimination. The pay increase this workforce would get under a higher federal minimum wage would be among the most valuable outcomes of making this law.
In the end, the CBO analysis confirms what we already knew: A higher federal minimum wage will significantly boost earnings and living standards for low-wage workers—especially those hit hardest by the COVID-19 pandemic—and it will have direct and significant fiscal effects.
1. In our analysis we did not take on the question of how a minimum wage increase is “financed” and instead just documented the likely fiscal effects stemming from the rise in low-wage workers’ earnings. The research literature is not entirely clear on how minimum wage increases are financed. There is some evidence that productivity increases, higher prices, and lower profits adjust to higher minimum wages. But, in the end, how the minimum wage increases are financed does not change the fact that they have large (if cross-cutting) fiscal effects. In fact, accounting for the financing—and assuming that prices rise and profits fall to accommodate higher wage costs—just increases the gross fiscal changes spurred by the higher federal minimum wage.
2. See Zipperer, Cooper, and Bivens (2021).
3. See Dube (2019).
4. CBO (2019) found that the declines in family income were concentrated on families with incomes over six times the poverty threshold. Table 4 of that analysis shows that these families had average incomes of $232,800 in 2018 dollars. Page 10 of today’s CBO analysis also finds that profit reductions and price increases will reduce incomes in the “highest quintile of the [family] income distribution.”
Dube, Arindrajit. 2019, Impacts of minimum wages: review of the international evidence, Report prepared for Her Majesty’s Treasury (UK), November.
Congressional Budget Office (CBO). 2019. The Effects on Employment and Family Income of Increasing the Federal Minimum Wage. July.
Neumark, David and Peter Shirley. 2021. “Myth of Measurement: What Does the New Minimum Wage Research Say About Minimum Wages and Job Loss in the United States?”, NBER Working Paper 28388.
Zipperer, Ben, David Cooper, and Josh Bivens. 2021. A $15 minimum wage would have significant and direct effects on the federal budget. Economic Policy Institute, February.