Congressional Budget Office Points to Possible Fallouts from Increased Minimum WageMarch 18th, 2021 by Drew Vass
As the administration presses for raising the federal minimum wage, a nonpartisan analysis issued by the Congressional Budget Office (CBO) examines how the Raise the Wage Act of 2021 would impact facets of the national budget. The same report delves into how increased wages could impact employment by leading some companies to lean on machinery and higher-skilled workers. When the cost for employing low-wage workers increases, the relative cost of employing higher-wage workers or investing in machines and technology goes down, officials for CBO suggest. “Some employers would therefore respond to a higher minimum wage by shifting toward those substitutes and reducing their employment of low-wage workers,” the analysis says.
Introduced on January 26, 2021, the act calls for incremental increases to the federal minimum wage over a period of years, reaching $15 per hour by June 2025, after which changes would parallel increases to median hourly wages. Estimated impacts are based on CBO’s economic forecasting and the assumption that nominal gross domestic product (GDP) will remain unchanged, officials say.
At the macro level, incremental increases to the federal minimum wage would grow the cumulative federal budget deficit by $54 billion over the next 10 years, CBO’s analysis indicates. Those increases would result partly from higher costs among government-consumed goods and services, stemming from increased payroll expenses. Employers facing higher minimum wages would pass a portion of those increases on to consumers via higher price tags, CBO predicts, in turn leading households to purchase fewer goods and services. The biggest increases would likely occur among sectors requiring the largest share of low-wage workers, such as restaurants. For those that lean away from low-wage labor—including in their supply chains—prices would rise less.
Should the bill be enacted, as the minimum wage reaches $15 per hour, the number of people living in poverty would be reduced by just under a million, but employment would be reduced by 1.4 million workers (or by roughly 1 percent), CBO estimates. As companies replace their lowest-paid workers with higher skillsets and machinery, the bill could detract from the labor market by eliminating positions, while also increasing federal costs for unemployment compensation. Additionally, as employers produce fewer goods and services, employment of workers at all wage levels could be further reduced, further increasing government spending for unemployment.
On a positive note, one offsetting factor includes the fact that, according to CBO’s data, lower-income families spend a larger proportion of additional income on goods and services than do higher-earning households. Those increases could work to reduce drops in employment, the analysis says.
As record low interest rates spur the economy to recovery from COVID-19, experts say that increases are inevitable in the years ahead. But according to CBO’s assessment, the Raise the Wage Act of 2021 would cause interest rates to be slightly higher than they would have been otherwise over a 10-year period. As a result, increased interest on federal debt and changes to inflation would add $16 billion to the deficit from 2021 to 2031, the analysis says.