Minimum Wage in US – CBO on the impacts of a $15 per hour by June 2025 on the federal budget

If enacted at the end of March 2021, the Raise the Wage Act of 2021 (S. 53, as introduced on January 26, 2021) would raise the federal minimum wage, in annual increments, to $15 per hour by June 2025 and then adjust it to increase at the same rate as median hourly wages. In this report, the Congressional Budget Office estimates the bill’s effects on the federal budget.

• The cumulative budget deficit over the 2021–2031 period would increase by $54 billion. Increases in annual deficits would be smaller before 2025, as the minimum-wage increases were being phased in, than in later years.
• Higher prices for goods and services—stemming from the higher wages of workers paid at or near the minimum wage, such as those providing long-term health care—would contribute to increases in federal spending.
• Changes in employment and in the distribution of income would increase spending for some programs (such as unemployment compensation), reduce spending for others (such as nutrition programs), and boost federal revenues (on net).

Those estimates are consistent with CBO’s conventional approach to estimating the costs of legislation. In particular, they incorporate the assumption that nominal gross domestic product (GDP) would be unchanged. As a result, total income is roughly unchanged. Also, the deficit estimate presented above does not include increases in net outlays for interest on federal debt (as projected under current law) that would stem from the estimated effects of higher interest rates and changes in inflation under the bill. Those interest costs would add $16 billion to the deficit from 2021 to 2031.

The estimates in this report are based on CBO’s most recent economic forecast, which was released earlier this month. CBO estimated the budgetary effects using techniques that it has developed over the past two years. Those estimates are based on CBO’s estimates of the bill’s effects on the economic behavior of individuals and firms—which in this report refers to actions that change relative prices, the distribution of income, employment, and other economic factors.

Underlying the budgetary estimates are CBO’s projections of how pay would change for people directly or potentially affected by an increase in the minimum wage—that is, people who would otherwise have been paid hourly wages that were less than the proposed new minimum or slightly above it—and how changes in pay would affect the number of people employed.

• From 2021 to 2031, the cumulative pay of affected people would increase, on net, by $333 billion—an increased labor cost for firms considerably larger than the net effect on the budget deficit during that period.
• That net increase would result from higher pay ($509 billion) for people who were employed at higher hourly wages under the bill, offset by lower pay ($175 billion) because of reduced employment under the bill.

In an average week in 2025, the year when the minimum wage would reach $15 per hour, 17 million workers whose wages would otherwise be below $15 per hour would be directly affected, and many of the 10 million workers whose wages would otherwise be slightly above that wage rate would also be affected. At that time, the effects on workers and their families would include the following:

• Employment would be reduced by 1.4 million workers, or 0.9 percent, according to CBO’s average estimate; and
• The number of people in poverty would be reduced by 0.9 million.

This report provides the following details about the bill and CBO’s estimates of its effects on federal spending and revenues:

• Background on the Raise the Wage Act of 2021;
• Effects on spending for major health care programs;
• Effects on spending for unemployment compensation;
• Effects on spending for Social Security;
• Effects on spending for nutrition programs;
• Effects on other mandatory spending;
• Effects on revenues;
• Effects on discretionary outlays for wages of federal workers;
• Effects on net spending for interest;
• Uncertainty surrounding the budgetary estimates; and
• How CBO’s analysis of budgetary effects has changed.

The report also provides the following information about changes in economic behavior underlying those estimates and about CBO’s analytical methods:

• Effects on employment;
• Effects on wages of affected workers;
• Effects on the distribution of family income;
• Effects on real (inflation-adjusted) output;
• Effects on prices;
• Effects on the distribution of labor and capital income;
• Effects on interest rates;
• CBO’s economic modeling approach; and
• Comparisons with CBO’s July 2019 analysis.

Chosen excerpts by Job Market Monitor. Read the whole story @ The Budgetary Effects of the Raise the Wage Act of 2021 | Congressional Budget Office

The reply by the Economic Policy Institute

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 Another recent review found that the median employment effect on workers directly affected by the minimum wage is less than half the size of what CBO assumed in its 2019 analysis.4 CBO’s exaggerated job loss assumptions account for 80% of the total increase in mandatory outlays.5

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 $200,000.6 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.

Chosen excerpts by Job Market Monitor. Read the whole story @ 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 | Economic Policy Institute

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