How Increasing the Federal Minimum Wage Could Affect Employment and Family Income

OPTION

Raise the minimum wage to $ by The subminimums for teenagers and disabled workers are eliminated.

How does increasing the minimum wage affect family income? By boosting the income of low-wage workers who keep their jobs, a higher minimum wage raises their families’ real income, lifting some of those families out of poverty. However, income falls for some families because other workers lose their jobs and business owners must absorb at least some of the higher costs of labor. For those reasons, the net effect of a minimum-wage increase is to reduce average family income.

How did CBO estimate effects on family income? CBO projected the distribution of family income in future years and then combined those forecasts with estimates of effects on wage rates, employment, business income, and prices. Effects on wage rates include increases mandated by the policy as well as increases in the wages of workers who would earn slightly more than the proposed minimum wage if the policy was not implemented. Losses in business owners’ income and consumers’ purchasing power are partially offset by an increase in the productivity of workers who receive higher wages. (That increase in productivity might occur through a variety of channels, such as a reduction in the turnover of workers.)

How does increasing the minimum wage affect employment? By increasing the cost of employing low-wage workers, a higher minimum wage generally leads employers to reduce the size of their workforce. However, for certain workers or in certain circumstances, employment can increase.

Changes in employment would be seen in the number of jobless, not just unemployed, workers. Jobless workers include those who have dropped out of the labor force (for example, because they believe no jobs are available for them) as well as those who are searching for work.

How did CBO estimate effects on employment? In CBO’s analysis, the size of the effects depends on the number of workers affected by the increase in the minimum wage, the changes in wages induced by the higher minimum, and the responsiveness of employment to those changes in wages. Effects would generally be greater if the minimum-wage change affected more workers, if it led to larger mandated increases for directly affected workers, if firms had more time to respond (for example, because the change was phased in over a longer period), and if the minimum wage was indexed to inflation or wage growth.

For details on CBO’s analysis, see Appendix A of The Effects on Employment and Family Income of Increasing the Federal Minimum Wage.

If workers lost their jobs because of a minimum-wage increase, how long would they stay jobless? At one extreme, an increase in the minimum wage could put a small group of workers out of work indefinitely, so that they never benefited from higher wages. At the other extreme, a large group of workers might shuffle regularly in and out of employment, experiencing joblessness for short spells but receiving higher wages during the weeks they were employed.

In analyzing the effects of joblessness on poverty, CBO used its estimates of the distribution of durations of unemployment in 2018 to assign directly affected workers either no joblessness or a duration of joblessness that was randomly chosen from that distribution. Thus, some workers in CBO’s analysis are out of work for nearly an entire year, whereas others are jobless for shorter—sometimes much shorter—periods of time.

How did CBO define the number of people in poverty? CBO used the same definitions of income and poverty thresholds that the Census Bureau uses to determine the official poverty rate. CBO projects that in 2025, the poverty threshold (in 2018 dollars) will be $20,480 for a family of three and $26,330 for a family of four.

How certain are these outcomes? There is considerable uncertainty about the size of any option’s effects on employment and family income. There are two main reasons why. First, future wage growth under current law is uncertain. If wages grow faster than CBO projects, then wages in future years will be higher than CBO anticipates, and increases in the federal minimum wage would have smaller effects. If wages grow more slowly than CBO projects, the effects would be larger.

Second, there is considerable uncertainty about the responsiveness of employment to an increase in the minimum wage. If employment is more responsive than CBO expects, then increases in the minimum wage would lead to larger declines in employment. By contrast, if employment is less responsive than CBO expects, the declines would be smaller. Findings in the research literature about how changes in the federal minimum wage affect employment vary widely. Many studies have found little or no effect, but many others have found substantial reductions in employment.

Would changing the minimum wage have other effects? Studies have examined the link between minimum wages and a range of outcomes other than employment and family income, including labor force outcomes such as labor force participation (whether a person is working or actively seeking a job); health outcomes such as depression, suicide, and obesity; education outcomes such as school completion and job training; and social outcomes such as crime. CBO did not examine those other possible outcomes in this analysis. However, a list of sources is available in Appendix B of The Effects on Employment and Family Income of Increasing the Federal Minimum Wage.

CBO also did not estimate how minimum-wage changes would affect the federal budget, either directly (for example, by raising the costs of employing some federal workers) or indirectly (for example, through increased spending on unemployment benefits). However, the agency previously estimated how proposed changes to the minimum wage under an earlier version of the Raise the Wage Act would directly affect the federal budget by boosting the pay of certain federal employees.

Directly affected workers. Workers whose wages would otherwise be between the previous minimum and the proposed minimum and who would either be jobless or see increases in their earnings in an average week.

Income group. Based on CBO’s projections of family income (in 2018 dollars) in 2025. CBO projects that in 2025, average income will be $10,700 for families with income less than the poverty threshold; $28,900 for families with income 1.0 to 1.49 times the poverty threshold; $39,200 for families with income 1.5 to 1.99 times the poverty threshold; $55,700 for families with income 2.0 to 2.99 times the poverty threshold; $95,300 for families with income 3.0 to 5.99 times the poverty threshold; and $232,800 for families with income 6.0 or more times the poverty threshold.

Potentially affected workers. Workers whose hourly wages are between the proposed minimum and that amount plus 50 percent of the increase in the federal minimum above their previously applicable (federal, state, or local) minimum wage. Only some of those workers would have increased earnings.

Range of likely outcomes. In CBO’s assessment, there is a two-thirds chance that the effect would be within this range.

Real family income. Before-tax family cash income (primarily earnings but also unemployment compensation, cash benefits from public assistance programs, and other forms of income), expressed in 2018 dollars. Changes in real family income include increases in earnings for workers receiving a higher wage, decreases in earnings for workers made jobless, losses in income for business owners, and decreases in purchasing power because of increases in prices.

Subminimums for teenagers and disabled workers. For teenage workers, $4.25 per hour during their first 90 days of employment; for disabled workers whose employers are certified by the Department of Labor, wages based on analyses of prevailing wages and worker productivity. The Department of Labor estimates that about 153,000 disabled workers were paid a subminimum wage in 2018.

CBO continually seeks feedback to make its work as useful as possible. Please send any comments to communications@cbo.gov.

Nabeel Alsalam, William Carrington, Justin Falk, Casey Labrack, and Kevin Perese developed this interactive tool with guidance from Joseph Kile and Molly Dahl. Mark Hadley and Jeffrey Kling reviewed it, Christine Browne edited it, Annette Kalicki integrated it into the website, and CBO’s communications team prepared it for release.