By Dr. Andrew Herr, associate professor of economics
Efforts to raise the federal minimum wage have intensified in recent months. In January, House Democrats reintroduced the Raise the Wage Act, which would gradually raise the federal minimum wage to $15 per hour by 2025. The House included the $15 minimum wage in its COVID-19 Relief Bill, which passed in late February. Later that month, the Senate stripped this provision from its version of the relief bill. On March 5, the Senate voted instead on a separate bill that would mandate a $15 minimum wage. This, too, failed to garner the requisite votes to pass, temporarily derailing the planned increase. Democrats have vowed to continue the fight, leaving its future uncertain.
Is the $15 minimum wage a good idea? Advocates see it as a critical policy that would raise wages for millions, reduce poverty and address racial and gender pay gaps. Employers, they argue, have the upper hand in wage negotiations, resulting in depressed wages for the most vulnerable workers. The Economic Policy Institute estimates that “nearly one-third (31%) of African Americans and one-quarter (26%) of Latinos would get a raise if the federal minimum wage were increased to $15.”
Furthermore, supporters argue that an increase is long overdue. Congress last increased the minimum wage in July 2009, nearly 12 years ago. Since then, inflation has eroded the purchasing power of the minimum wage by nearly 20 percent. The Raise the Wage Act would address this problem by tying the minimum wage to inflation. After reaching $15 per hour in 2025, the minimum wage would automatically increase each year at the same rate as median hourly wages after it reached $15 per hour in 2025.
So why would anyone oppose a $15 minimum wage? Quite simply, critics worry that raising the minimum wage to this level would destroy jobs. Many of you reading this article work for less than $15 per hour. How would your employer react to a $15 minimum wage? Would you and your coworkers continue to get as many hours as you currently do? Would your employer pass the additional costs to customers through higher prices? Basic economic analysis predicts that businesses will respond by cutting back on workers and increasing prices.
A recent report by the non-partisan Congressional Budget Office (CBO) attempts to quantify the tradeoff between the benefits of a higher minimum wage (higher wages) and its costs (job losses). The CBO estimates that as many 27 million Americans would get a raise if the minimum wage were increased to $15 per hour by 2025 and that this would lift 900,000 Americans out of poverty. On the other hand, it estimates that 1.4 million Americans would lose their jobs.
Is there a way to capture some of the benefits of an increased minimum wage without such massive job losses? Perhaps, if the minimum wage supporters focus their efforts more locally. A key weakness of the federal minimum wage is that it fails to recognize the vast differences in wages and cost of living between different locations. Consider Seattle and Latrobe. Seattle’s average wage is 40% higher than Latrobe’s and its cost of living is more than double Latrobe’s. Thus, an employer in Seattle is better able to absorb a $15 minimum wage than an employer in Latrobe.
Cities and states are free to set minimum wages above the federal minimum. In fact, 29 states and the District of Columbia currently do so. Seattle has gone even further, setting its minimum wage at $16.39, the highest in the country. Rather than pursuing a drastic increase in the federal minimum wage, a more flexible approach would be to set the federal minimum wage as a true minimum wage, index it so that it rises with inflation and encourage states and cities to set higher minimum wages that better reflect local conditions.
Such a proposal is currently on the table. Senators Mitt Romney (R-UT) and Tom Cotton (R-AR) recently introduced the Higher Wages for American Workers Act, which would gradually raise the federal minimum wage to $10 and index future minimum wage increases to inflation. The CBO estimates that 3.5 million Americans would receive a raise under this proposal with virtually no job losses. Stay tuned to see whether this more modest proposal will garner bipartisan support.