By Joyce Beebe, Ph.D.
Fellow in Public Finance
The $1.9 trillion American Rescue Plan Act—which includes key provisions such as the $1,400 economic relief payments, extended unemployment benefits, funds for state and local governments, and public health related expenditures to combat the pandemic—became law in mid-March. Since its announcement in January, the law has attracted tremendous attention, not only because of what it includes, but also because of what it does not. Most notably, the package left out the mandate to increase the federal minimum wage to $15 per hour. This blog discusses different opinions regarding increasing the minimum wage, potential impacts of the current proposal and possible future developments.
The Pros and Cons of a Nationwide $15 Minimum Wage
The current federal minimum wage of $7.25 per hour has not been adjusted since 2009. With inflation and price increases, this decade-long stagnant wage standard either forces minimum wage workers into poverty, or propels them to take on multiple jobs to make ends meet. However, in contrast to the lack of federal action, many state governments have passed laws to increase statewide minimum wage standards. As of January 2021, 29 states and Washington, D.C. have minimum wages higher than the federally required $7.25 per hour. The remaining 21 states fall into three groups: they either have no state minimum wage laws (Alabama, Louisiana, Mississippi, South Carolina and Tennessee), have state minimum wages below the federal rules (Georgia and Wyoming), or have the same minimum wage level as the federal requirement (the remaining 14 states). Regardless which group each state belongs to, they all still have an effective minimum wage of $7.25 per hour under federal rules.
Because more than half of all states have taken action to include higher minimum wage standards, supporters see this as a validation that the federal minimum wage needs to be reviewed – and they believe a federal mandate of $15 per hour will bring consistency across states and provide a reasonable living wage.
Some opponents, however, interpret state actions differently. They support the minimum wage increase but believe the labor market is regional. In other words, $15 per hour may not be the answer for every single state. They point out that there is a wide spectrum of actions among states that have increased minimum wages. Some states have indexed the minimum wage to the consumer price index (CPI, a common measure of inflation) or the cost of living (an amount needed to reach a certain standard of living), while other states have raised the state minimum wage anywhere from $9 to $15 per hour. Critics also point out that each state has a different phase-in time to reach its state-mandated minimum wage level. Some states have implemented new wage standards immediately, while others have applied small increments over an extended period of time to reach the final goal. For instance, Michigan passed laws in 2018 to increase the minimum wage to $12.05 on a set schedule between 2019 and 2030. The provision specifies that if the state’s unemployment rate in the preceding year exceeds 8.5%, the wage increase will not take place in the following year – which is the case for 2021.
Another challenge is that the $15 minimum wage is not a panacea. Raising the minimum wage often has serious side effects – most prominently, unemployment. The current bill, Raise the Wage Act of 2021, proposes to increase the nationwide minimum wage starting in June 2021 (to $9.50 per hour) and adjusts annually by $1.50 per hour until reaching $15 per hour in June 2025 (i.e., $9.50, $11, $12.50, $14 and finally $15 per hour for the next five adjustments). Opponents claim that this proposal will cause unemployment for some low-income households, a group the policy intends to help in the first place.
The Congressional Budget Office (CBO), the nonpartisan research arm that provides information and economic analysis of certain policies to congressional members and the public, published a study in February summarizing the budgetary effects of the minimum wage policy. The study states that the proposal would help 900,000 workers get out of poverty, but, at the same time, it would cause 1.4 million people to become unemployed. Although the study does not provide formal policy recommendations, observers indicate that the overall impact on employment may not be limited to lower headcounts and reduced hours for employees — it could also lead employers to replace minimum wage workers with machines. The threat of automation is already visible and has been intensified by the pandemic. There are self-checkout counters in grocery stores, housekeeping robots in hotels and food delivery robots in urban areas, among other examples.
The Impact
Generally, an increased minimum wage directly impacts employers as a result of higher labor costs. These business owners absorb increased costs through reduced profits and pass part of the costs on to customers. However, the extent to which business owners can shift costs to customers depends on industry competiveness, the nature of their products or services and customer loyalty, among many other factors. As a result, all consumers end up bearing part of the burden as products and services become more expensive. Ultimately, higher-income households incur more of the burden than lower-income households because they spend more in absolute dollar terms. In a separate 2019 report, the CBO illustrated three different scenarios if the minimum wage was adjusted to $10, $12, or $15 per hour. Not surprisingly, a minimum wage increase to $15 per hour would have the largest impact on employment and family income and the impact would be more modest when the adjustment is to $12 per hour. An increase to $10 per hour would have the smallest effect.
Although the policy change would directly affect business owners, certain workers and consumers, it would affect every single taxpayer, though in less visible ways. The CBO study estimates that the Raise the Wage Act of 2021 would cost the government about $5.4 billion per year for the next decade through spending adjustments of several government programs and changes in tax collections.
Specifically, higher unemployment would increase the unemployment benefit expenditures. In addition, many workers in the home health care and nursing care industries earn less than $15 per hour and are paid out of public health care programs. A $15 minimum wage would increase payments to these workers and lead to higher Medicare and Medicaid spending. On the other hand, higher wages would reduce the Earned Income Tax Credit expenditure, a refundable tax credit heavily relied on by lower-income households with dependents. Increased income is also expected to reduce workers’ reliance on the Supplemental Nutrition Assistance Program, a federal food assistance program for low- to moderate-income households.
From a tax-revenue perspective, higher labor income is expected to increase personal income tax and payroll tax collections, whereas increased labor costs would lead to lower business profits, meaning tax collection from businesses would also be lower.
The Turning Point
A major turning point of the minimum wage debate took place in late February, when the Senate Parliamentarian ruled the proposal could not be part of the coronavirus relief package that was being fast-tracked through the reconciliation process. The decision stemmed from the requirement that a measure needs to have meaningful fiscal impacts to be part of the budget reconciliation process, and the minimum wage proposal fell short of this requirement. Practically, the reconciliation process allows certain types of legislation to pass the Senate on a simple majority, bypassing the 60-vote requirement, but the inability to include the minimum wage proposal in the relief package meant a higher threshold was needed to pass the bill.
Supporters of the $15 minimum wage went through several iterations within the next four days in response to this surprise defeat. First was denial, which involved certain senators proposing to ignore or deny the Senate Parliamentarian ruling. This was short-lived since many others, including officials at the White House, expressed disapproval of the notion.
Then, several senators circulated the tax penalty idea, which would deny tax deductions for large companies that do not pay a $15 minimum wage while providing smaller businesses tax incentives for paying a $15 minimum wage. Under this proposal, companies would either pay their workers or the government; most would probably choose the former. The tax penalty idea would certainly pass muster for having enough “fiscal impact.” However, some lawmakers worried that disguising a minimum wage mandate as a tax policy could be misleading to business owners, who may realize that they need to pay taxes at the 11th hour and scramble to make changes. It could also be challenging to get all senators to agree on the detailed wording of the tax proposal within a short time. All these considerations led to the decision of dropping the minimum wage proposal and focusing on passing the American Rescue Plan Act before the March 14 cutoff.
To Be Continued …
Although there have been many uncertainties regarding the minimum wage proposal, it is certain that the minimum wage debate is not over. Supporters of increasing the minimum wage are going back to the drawing board to find the most feasible way to move the policy forward, and there is no shortage of alternatives. For instance, some Republican senators proposed gradually increasing the minimum wage to $10 per hour and requiring that employers E-Verify their workers’ employment eligibility. Other senators, including both Republicans and Democrats, voiced support for a more modest increase to $11 or $12 per hour, but not as high as $15 per hour. State governments could still supplement this with their own rules for a higher standard if they so desired. There are also proposals advocating for a regional approach, where federal rules would separate states into different regions with different minimum wages accordingly.
Few policies attract as much attention as those regarding the minimum wage. However, it is crucial to bear in mind that a compromise is better than no adjustment at all. Going beyond the current minimum wage discussion, there are several additional elements to remember. Specifically, the current proposals do not cover self-employed workers or independent contractors, but the number of these workers is increasing rapidly. A recent IRS publication revealed that although workers with employee status still file more copies of tax returns, the tax return filings from independent contractors are growing at a faster rate than that of employees.
In addition, a higher minimum wage does not replace the discussion of improving workplace benefits. The pandemic highlighted the importance of paid sick leave, and benefits such as medical insurance and retirement savings are highly valued by workers. It is promising to have an engaging, open policy discussion regarding the minimum wage. A next step to consider, for both policymakers and employers, is designing a portfolio of benefit offerings that enables workers to contribute to their communities and live meaningful lives.