By: Nathan Baker
The first few months of 2021 have been nothing if not chaotic. Trying to find objective, factual information about the world’s constant changes can be difficult, and the abundance of left- and right-leaning biased media outlets don’t make things any easier. Amidst the confusion, the raise of the federal minimum wage sticks out as one of the most hotly debated and commonly misunderstood proposed changes.
Regardless of political leanings, the importance of being well-informed on national economic policies before taking a final stance cannot be overstated. Through an unbiased analysis of past federal minimum wage increases and a look at projections for President Biden’s proposed Raise the Wage Act, Americans can better understand what the projected increase in unemployment and decrease in poverty really mean.
A Historical View
Perhaps the best way to predict the future, especially in economic models, is by studying the past. A comprehensive study done by Paul K. Sonn and Yannet Lathrop, experts in living and minimum wage for the National Employment Law Project (NELP), compared the state and federal minimum wage hikes in the United States from 1938 to 2009. The trends are illustrated in Figure 1.
The arrows reflect employment growth and decay while the time periods that reflect major economic recessions in the U.S. are highlighted in yellow. Their study reveals that 68% of the time, unemployment decreases following minimum wage increases. The study also demonstrates that each of the minimum wage changes that are accompanied by subsequent unemployment occurs during nationwide economic recessions, so the job loss could be attributed to outside factors.[1]
While these statistics are very encouraging, it is important to note that a federal minimum wage hike matching the magnitude of President Biden’s proposal has never been done before.
Figure 1
Source: National Employment Law Project[2]
Based on all documented federal minimum wage changes, no increase of more than one dollar has ever been executed.[3] That being the case, President Biden’s proposal has an incremental implementation plan that more than doubles the minimum wage from $7.25/hour to $15/hour by June of 2025.[4]
Due to the magnitude of the change, there are no historical examples from which to draw an accurate analysis. However, the lack of past experience can be somewhat negated by the Congressional Budget Office’s (CBO) detailed projections on how employment will respond to the potential changes.
Increased Unemployment
According to the CBO’s comprehensive overview of the Raise the Wage Act’s effects, unemployment will increase by about 0.9%. While this may seem rather minimal, that small percentage will result in 1.4 million Americans left jobless.[5] This consequence is a likely result of businesses, especially small businesses, being forced to lay off employees in an attempt to cope with their augmented wage expenses.
As a result of the act, the workers who will lose their jobs will be employees who currently work at or near minimum wage. The majority of this demographic is made up of high school and college students and low skills jobs in the leisure and hospitality industries, primarily consisting of the entertainment and restaurant industries.[6] While one good intention of the Raise the Wage Act is to lift members of the lower class out of poverty, it could potentially have the opposite effect.
Figure 2, provided by the American Action Forum, a non-profit organization run by the former director of the CBO, shows the distribution of minimum wage workers based on educational attainment.[7]
Figure 2
Source: CBO[8]
As illustrated, nearly 90% of all workers that are paid at or below the minimum wage have not attained a bachelor’s degree. Due to the magnitude of the proposed wage change, any worker making less than $15/hour could be at risk of unemployment.
Further data reflecting educational attainment by ethnicity released by Statista, an industry leading data provider, is found in Figure 3. This graph shows that Blacks and Hispanics are the most likely demographics to not attain a high school diploma or college degree, and thus fall into the low-wage demographic.
Figure 3
Source: Statista[10]
While the minimum wage raise could help lift low-income families out of poverty, the unlucky families whose breadwinners lose their jobs could yield disproportionate increases in unemployment among minority households.
Another factor that makes unemployment especially risky at this time is the United States current economic state. As mentioned in the historical analysis, the only examples of a minor minimum wage raise increasing unemployment occurred during periods of recession. The economic response to the Coronavirus pandemic has placed the U.S. in a fragile economic environment. National unemployment is still up 2% from its pre-pandemic rate, sitting at 6.2%[11], and a major adjustment to the wage could have exaggerated effects due to the current economic climate.
Remember, however, that increased unemployment is merely a projection. While significant research and data is used to support these projections, there can be substantial variance in the outcome. Liana Fox, a poverty measurement statistician for the U.S. Census Bureau said the following:
The belief that raising the minimum wage causes job loss was more commonly accepted by economists decades ago, but high-quality research by leading academic economists has forced the economic community to re-evaluate these arguments. This consensus view rapidly eroded following evidence from the 1990s. Even Benjamin Bernanke, President Bush’s appointee as the chairman of the Federal Reserve, has noted that ‘economists disagree about …whether increases in the minimum wage reduce employment of low-wage workers.’”[12]
The disagreement primarily comes from the difficulty in maintaining variables constant throughout historical studies. Since it is unethical to perform economic experiments on actual countries or communities, historical data is the only source of guidance. This data typically has undesired variance in the magnitude of the wage change–such as preexisting economic conditions, annual inflation, and other factors–making comparison difficult. This problem will be resolved over time as countries experiment with different policies, but for now we are left with relative uncertainty about the unemployment cost of the policy.
Decreased Poverty
The projected benefit that is expected to counteract unemployment is a decrease in U.S. poverty. The poverty level is calculated based on a minimum net income necessary for families or individuals to cover the basic costs of living.[13] As illustrated in Figure 4, an individual making less than $12,800 a year would be considered part of the poverty demographic. For each additional member of the household, the poverty level based on the necessary net income minus expenses increases by about $5000 per person.
CBO projections relating to the Raise the Wage Act predict that 900,000 workers would increase their income above the poverty level.[14] With the magnitude of the wage raise, even a family of four with one breadwinner would make an annual income that surpasses the poverty level, also shown in Figure 4.
While the method for decreasing poverty remains clear (increasing net income), the subsequent effects are unclear. In what specific ways will the national economy benefit? What improvements will we see in the lives of those who are raised out of poverty?
Figure 4
Source: EPI[15]
The principle macroeconomic benefit will be increased spending, which subsequently stimulates the growth of small businesses and sustains larger corporations. Just as stimulus checks serve the purpose of increasing consumer spending to strengthen local businesses, families that have higher incomes will spend more and stimulate growth. When a local economy grows, new jobs appear, thus counteracting unemployment and giving businesses the necessary revenue to make increased wage expenses affordable.
Unfortunately, this economic stimulation and increased spending can be counteracted by increased prices of goods. As companies bear the load of higher wage expense, they are often forced to inflate their prices in order to cover new costs. Figure 5 illustrates how these spending and inflation cycles oppose each other.
Figure 5
Source: Original graphic
Additionally, the costs of poverty are not restricted to low-income families but affect society as a whole. A report released by the Children’s Defense Fund, a non-profit organization created to fight childhood poverty, explained the breadth of the costs of poverty:
The children who suffer poverty’s effects are not its only victims. When children do not succeed as adults, all of society pays the price: businesses are able to find fewer good workers, consumers pay more for their goods, hospitals and health insurers spend more treating preventable illnesses, teachers spend more time on remediation and special education, private citizens feel less safe on the streets, governors hire more prison guards, mayors must pay to shelter homeless families, judges must hear more criminal, domestic, and other cases, taxpayers pay for problems that could have been prevented, fire and medical workers must respond to emergencies that never should have happened, and funeral directors must bury children who never should have died.[16]
Decreasing poverty not only prevents these outcomes, but it also makes the dream of obtaining a college degree a real possibility for many more Americans. Parents with higher incomes will have the opportunity to save extra money to contribute to their children’s education, and college-age students will have more access to part-time jobs that pay well enough to support them in school. Increased accessibility to education could help diminish the gap between the upper and lower class and give minorities a greater chance to succeed.
Conclusion
Unfortunately, plenty of questions regarding the Raise the Wage Act are still unanswered, and readers may continue to have mixed feelings. This analysis is in no way a comprehensive look at the minimum wage raise. The CBO has released dozens of projections on how the bill will affect government spending, healthcare and health insurance costs, income taxation, Social Security, and dozens of other effected areas. However, the purpose of this article is to clarify how the two primarily debated aspects–job loss and decreased poverty–will actually play out.
Unemployment could reach the projected 1.4 million, or perhaps businesses will be able to cope with increased wage expense with increased consumer spending.
Nearly a million Americans and their families could be boosted above the poverty level, yet other families could be driven farther down into poverty from job loss.
While there may not be a definite right or wrong answer, remember to look at the facts, weigh the consequences, and have an open mind. Dig deeper than the surface arguments by not taking the easy out as these economic policies will shape the United States for decades to come.
[1] Paul K. Sonn, Yannet M. Lathrop “Raise Wages, Kill. Jobs?” National Employment Law Project, May 2016, https://s27147.pcdn.co/wp-content/uploads/NELPData-Brief-Raise-Wages-Kill-Jobs-No-Correlation.pdf.
[2] Paul K. Sonn, Yannet M. Lathrop “Raise Wages, Kill. Jobs?” National Employment Law Project, May 2016,
https://s27147.pcdn.co/wp-content/uploads/NELPData-Brief-Raise-Wages-Kill-Jobs-No-Correlation.pdf.
[3] “History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938 – 2009,” US Department of Labor, January 2010, https://www.dol.gov/agencies/whd/minimumwage/history/chart.
[4] “The Budgetary Effects of the Raise the Wage Act of 2021,” U.S. Congressional Budget Office, February 2021, https://www.cbo.gov/system/files/202102/56975-Minimum-Wage.pdf.
[5] “The Budgetary Effects of the Raise the Wage Act of 2021,” U.S. Congressional Budget Office, February 2021, https://www.cbo.gov/system/files/202102/56975-Minimum-Wage.pdf.
[6] Isabel Soto, “Examining the Effects of Raising the Federal Minimum Wage to $15,” American Action Forum, January 27, 2021, https://www.americanactionforum.org/insight/exa mining-the-effects-of-raising-the-federal-minimumwage-to-15/.
[7] Isabel Soto, “Examining the Effects of Raising the Federal Minimum Wage to $15,” American Action Forum, January 27, 2021, https://www.americanactionforum.org/insight/exa mining-the-effects-of-raising-the-federal-minimumwage-to-15/.
[8] “The Budgetary Effects of the Raise the Wage Act of 2021,” U.S. Congressional Budget Office, February 2021, https://www.cbo.gov/system/files/202102/56975-Minimum-Wage.pdf.
[9] “Percentage of educational attainment in the United States in 2018, by ethnicity,” Statista, 2019, https://www.statista.com/statistics/184264/educati onal-attainment-by-enthnicity/.
[10] “Percentage of educational attainment in the United States in 2018, by ethnicity,” Statista, 2019, https://www.statista.com/statistics/184264/educati onal-attainment-by-enthnicity/.
[11] “United States Unemployment Rate,” Trading Economics, March 2021, https://tradingeconomics.com/unitedstates/unemploymentrate#:~:text=Looking%20forward%2C%20we%20esti mate%20Unemployment,according%20to%20our%2 0econometric%20models.
[12] Liana Fox, “Minimum Wage Trends”, Economic Policy Institute, October 24, 2006, https://www.epi.org/publication/bp178/.
[13] “How the Census Bureau Measures Poverty,” United States Census Bureau, August 26, 2020, https://www.census.gov/topics/incomepoverty/poverty/guidance/poverty-measures.html
[14] “The Budgetary Effects of the Raise the Wage Act of 2021,” U.S. Congressional Budget Office, February 2021, https://www.cbo.gov/system/files/202102/56975-Minimum-Wage.pdf.
[15] Liana Fox, “Minimum Wage Trends”, Economic Policy Institute, October 24, 2006, https://www.epi.org/publication/bp178/.
[16] “Why is it important to reduce poverty?” Confronting Poverty, Last modified 2021, https://confrontingpoverty.org/poverty-discussionguide/can-we-estimate-the-overall-costs-ofpoverty/#:~:text=When%20children%20do%20not% 20succeed,education%2C%20private%20citizens%20 feel%20less.