Potential Impact of a $15 Minimum Wage

February 10, 2021

The Congressional Budget Office on Monday released a report outlining the potential impact of raising the federal minimum wage to $15 an hour by 2025. The nonpartisan study said that more than doubling the current rate of $7.25—in place since 2009—would cost 1.4 million jobs by 2025 and increase the country’s deficit by $54 billion over 10 years.

However, it would also bring 900,000 people out of poverty and raise income for 17 million workers, or about one in 10 employed people (10 percent of the workforce). Additionally, 10 million more workers with wages just above the line could potentially gain increases.

The CBO assumed a June 1 enactment date for the Raise the Wage Act, which was put forth by Democrats in both chambers of Congress in late January, and would bring the federal rate to $9.50 an hour before continuing to lift every year through 2025 to $15. At that point, it would index the minimum wage to median wages.

Sean Kennedy, EVP of public affairs at the National Restaurant Association, said in a statement Monday the report supports earlier concerns, when he described raising the minimum wage from $7.25 per hour to $15 and eliminating the tip credit for servers as “an impossible challenge for the restaurant industry.”

“Today’s CBO Report predicts that increasing the minimum wage could result in the loss of as many as 2.7 million jobs. This on the heels of last week’s jobs report showing that restaurants have lost nearly 500,000 jobs in the last three months,” Kennedy said. “Regaining the industry employment level lost to the pandemic will take years. Add an unplanned increase in labor costs—that in some states could be as much as 600 percent—and the industry may never be able to recover in states where restaurant jobs are most needed.”

“It’s an overwhelming challenge for an industry that’s already stretched to the brink financially. The time has come for a robust and bipartisan conversation about wages,” he added. “The National Restaurant Association and our members are eager for this conversation, and we look forward to engaging with Congress and the Biden Administration to shape changes that benefit employees and restaurants alike.”

According to data in a recent study from Harri, 82 percent of restaurants are opposed to increasing minimum wage to $15 per hour, with 89 percent saying a lift of that magnitude would disrupt business practices and P&L.

If the number hit $15, 85 percent said they’d be forced to raise menu prices to offset wage pressures. Sixty-nine percent said they’d reduce employee hours; 62 percent would eliminate jobs; and 27 percent would close additional locations.

Also, 61 percent would deploy new technologies; 64 percent eliminate ancillary positions; and 16 percent activate a commissary to augment back-of-the-house activities.

Getting to $15 would also surely usher in platforms to counteract traditional labor. Fifty-two percent of operators in Harri’s survey said they’d deploy a predictive schedule program; 46 percent would roll out a labor-related compliance monitoring system; 29 percent launch a biometrically controlled time and attendance system; and 49 percent create a more efficient hiring platform.

The Raise the Wage Act aims to increase minimum wage for teenagers and disabled workers, and increase the share of the minimum wage for tipped workers who must be paid by their employers. The minimum wage for those workers has long been different from the minimum wage for other employees.

The CBO echoed Harri’s data in places, especially with price hikes and technology upgrades. “Higher wages would increase the cost to employers of producing goods and services. Employers would pass some of those increased costs on to consumers in the form of higher prices, and those higher prices, in turn, would lead consumers to purchase fewer goods and services,” the report said. “Employers would consequently produce fewer goods and services, and as a result, they would tend to reduce their employment of workers at all wage levels.”

CBO spotlighted restaurants in particular. The Raise the Wage Act would change the relative prices of goods and service, it said. The largest price increases, relative to the average increase, “would be for goods or services whose production required a larger-than-average share of low-wage work, such as food prepared in restaurants.” For goods and services that used less low-wage labor in their supply chains, prices would rise less.

And on technology:

“When the cost of employing low-wage workers goes up, the relative cost of employing higher-wage workers or investing in machines and technology goes down. Some employers would therefore respond to a higher minimum wage by shifting toward those substitutes and reducing their employment of low-wage workers,” the CBO said.

The CBO’s report predicted the cumulative federal budget deficit would increase due to higher priced goods and services leading to a bump in federal spending. Government spending on nutrition supplements would drop, the report said, but that would be offset by heightened spending on Social Security benefits, unemployment benefits, and healthcare programs.

The net pay of America’s workers would grow by $333 billion. The increase in pay for workers would more than double the amount subtracted by the workers who lose their job, the CBO predicted.

Or broken down as:

From 2021 to 2031, cumulative pay would increase by $509 billion for people who were employed at higher hourly wages under the bill, the CBO said. Pay would decline by $175 billion because employment would be reduced in that period. Therefore, the cumulative pay of directly and potentially affected workers would increase, on net, by $333 billion.

The CBO added enrollment in Medicaid would decrease due to workers earning more. Yet program costs would go up thanks to higher prices for medical services. And there’s a possibility economic output would decline slightly due to higher unemployment.

The report is sure to inspire kickback from both sides, with proponents saying benefits to low-wage workers outweigh the costs. Heidi Shierholz, director of policy at the Economic Policy Institute, said Monday, “It’s really not a stretch to say that new consensus has emerged that minimum wage increases do not result in substantial job loss,” according to The Washington Post. Shierholz was also critical of the CBO’s cost-calculating methodology, labeling it outdated.

President Joe Biden pushed a $15 federal rate in his wide-ranging $1.9 trillion COVID-19 relief plan announced last month. But he admitted Friday on CBS Evening News he didn’t expect the measure to make the current package, which is being negotiated by Congress.

Biden added he was prepared for a “separate negotiation” on the $15 subject.

On Friday, the Senate passed a budget resolution that cleared the way for Democrats to pass the relief bill without Republican support. Several amendments were attached to the resolution, including direct funding for restaurants and the rejection of $15 minimum wage during the pandemic.

Amendments are non-binding, and designed more to force lawmakers to vote on record. The amendment to prevent the $15 minimum wage during the pandemic was brought forth by Republican Sen. Joni Ernst.

Notably, it was an amendment to prevent the $15 minimum wage from going into effect “during the pandemic.” Sen. Bernie Sanders and others have pushed for $15 over five years, as noted and measured in the CBO report.

Additionally, because increasing the minimum wage would shift income toward families with lower income, the CBO believes it would boost overall demand in the short term. Lower-income families spend a larger proportion of any additional income on goods and services than do families with higher income. And so that increased demand for goods and services would reduce the drop in employment for several years after the implementation of a higher minimum wage.

All that into account, the Raise the Wage Act, the CBO said, would reduce employment by increasing amounts over the years. “In 2021, most workers who would not have a job because of the higher minimum wage would still be looking for work and hence be categorized as unemployed,” the report said. “By 2025, however, half of the 1.4 million people who would be jobless because of the bill would have dropped out of the labor force … Young, less educated people would account for a disproportionate share of those reductions in employment.”

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