Commentary Directory

Minimum Wage Research in the Spotlight as a Hike Looks Inevitable

Jacob Hess
February 04, 2021

President Joe Biden's term is entering its third term, and his administration and the Democratic majority in Congress have been hard at work introducing new policies to combat COVID-19 and improve the economy. One of these policies has been hotly debated and seemed unlikely to see the light of day before President Biden took charge, the $15 federal minimum wage. The policy has been introduced in the House bill named "The Raise the Wage Act of 2021." The bill would do the following:

  • Raise the federal minimum wage to $15 by 2025
  • Index future increases to median wage growth.
  • Guarantee tipped workers receive the minimum wage.
  • Guarantee teen workers receive the minimum wage.
  • End subminimum wages for workers with disabilities.

This policy always inspires debate and a library of economic research that weighs the costs and benefits of deploying the wage floor, and this time is no different. The main arguments are classic. Raising the minimum wage will lift people out of poverty who have experienced wage stagnation in an inflationary environment. The classic counter is that rising business costs will force businesses who can't pay those wages to cut jobs. Economic research addresses both of these concerns while also addressing other externalities, and the resulting reports are always interesting. Here are some publications that have come out recently as the minimum wage is reintroduced in Congress.

The Economic Policy Institute conducted an analysis that estimated the impact of the federal minimum wage hike on annual government expenditures. They found that "annual government expenditures on major public assistance programs would fall by between $13.4 billion and $31.0 billion" with reductions seen in the use of the earned income tax credit (EITC), the child tax credit (CTC), and food stamps (SNAP). The increase would also increase contributions to federal insurance (FICA). The basis of these conclusions that rising income at the lowest level would allow many households to avoid using the above government programs. This expands on a paper by Dube that estimates every $1 gain in family income results in a $0.34 reduction in public benefits use.

Another paper from the Winter 2021 version of the Journal of Economic Perspectives attempts to quantify the effect on employment that is so often discussed. The authors focus on a sensitive cohort in this discussion, teen workers, who would be the most likely to be laid off because of a minimum wage hike. However, the effects of that would be minimal because of the declining share of teen workers in the labor market. The report points out that only 2.0% of all hours worked in 2019 were by teenagers aged 16 to 19, down from 4.2% in 1990 and 10.7% in 1979. Therefore, it concludes that the employment effect is ambiguous and not robust from models that analyze teen workers.

Another research brief from the UC Berkeley Labor Center looked at the savings on public safety net papers, similar to the Economic Policy Institute. Their analysis is based on data that suggests just under half (47%) of the workers that would benefit from the minimum wage increase have at least one family member enrolled in a safety net program. The total cost of these enrollments to federal and state governments is somewhere around $107 billion a year. Theoretically, the government would save this money after the hike, but the authors do not make this direct claim.

Collection of elasticity estimates from research on a minimum wage hike.

The esteemed National Bureau of Economic Research (NBER) released its own meta-analysis of minimum wage research last month. Some observations include:

  • A large number of negative employment effect estimates.
  • Stronger evidence in papers looking at teens, young adults, and the less-educated.
  • Studies looking at affected workers show even more negative results.
  • Studies of low-wage industries aren't as one-sided.

In particular, the NBER finds that the probability of observing the number of negative employment effect estimates in the papers it looks at is very small suggesting the conclusion that there are no adverse effects from a minimum wage increase as probably incorrect. The extent of the likely adverse effect is ambiguous with the median and average elasticity estimates from the papers at -0.12 and -0.15, a slight negative.

One interesting externality that was researched was infant mortality. Research from the Center for Aging and Policy Studies and the Lerner Center for Public Health Promotion. The logic follows that the minimum wage increases would lead to greater wealth which is already known to lead to increases in general health outcomes. This includes "teenage pregnancy, maternal smoking, obesity, and adverse birth outcomes" which all contribute to infant mortality. In short, the conclusion was that a $15 minimum wage would save the lives of an estimated 1,400 infants with an annual savings of $13.4 billion.

These reports are just a few of the more recent publications on the topic of the $15 minimum wage. They present different arguments and models with various conclusions of the cost-benefit analysis that is constantly debated. With a Democratic Congress and a Biden administration, the US might finally see how these modes play out in reality. All we can do is wait and see.