Contextualizing the Raise the Wage Act of 2021

Raj Ashar | February 2021

Sen. Bernie Sanders speaks at a minimum wage rally in Washington, D.C., April 2017

 

Currently, the federal minimum wage sits at $7.25. Many states have higher minimums, although if a $15 wage were to be implemented today, it would be higher than that of any state.  Additionally, the real value of that $7.25 wage is lower today than it has been in the past. In a 2019 report, the Economic Policy Institute (EPI) found that the  $7.25 minimum wage was worth 17% less than in 2009 and 31% less than in 1968 when adjusting for inflation. Some states have remedied this by attaching the minimum wage to the Consumer Price Index, but according to the EPI report, 29 out of 50 states did not increase the minimum wage between 2000 and 2018. 

These numbers underscore the need for an increase in the wage, at least to keep up with inflation, but the $15 wage aims to do much more than that. The primary argument for the wage hike to $15 per hour says that our wages are too low; people are working full-time, and are still below the poverty line. The argument against: increasing the minimum wage to $15 will cripple small businesses, and any benefit to wage-earners will be offset by those who will lose their jobs due to the rising costs of business. 

Mixed Evidence

Evidence on these has largely been mixed. A seminal economics paper by Alan Krueger and David Card found no significant drop in employment for fast-food workers in New Jersey when the wage was increased from $4.25 to $5.05 per hour. However, a 2018 paper by Grace Lordan and David Neumark finds that increasing the minimum wage “decreases significantly the share of automatable employment held by low-skilled workers, and increases the likelihood that low skilled workers in automatable jobs become nonemployed or employed in worse jobs.” A difficulty in applying these types of studies to the current potential wage hike is the scale and current economic environment. A wage hike will likely affect different localities differently due to different starting points; California has a minimum wage of $12, while Oklahoma’s is $7.25. Therefore an increase to $15 is far less drastic of a change in Oklahoma, especially considering differences in market conditions and rental prices between the two states. In empirical wage research, often one locality is studied, not an entire nation. Additionally, with the pandemic, there are simply factors that previous research cannot account for, including drastic shifts in consumer spending habits. 

A recent report by the Congressional Budget Office modeled the potential impacts if the Raise the Wage Act of 2021 were to be implemented at the end of March. The report noted that 900 thousand people would be lifted out of poverty, and “Employment would be reduced by 1.4 million workers.” The CBO also attempted to directly compare these costs and benefits, projecting that “From 2021 to 2031, the cumulative pay of affected people would increase, on net, by $333 billion—an increased labor cost for firms considerably larger than the net effect on the budget deficit during that period.”

The $15 wage campaign is on the brink of success with the Raise the Wage Act of 2021. However, the economic literature notes that there are clear costs and benefits to minimum wage increases. While the CBO report predicts that the costs will outweigh the benefits, the effects of each year’s wage increase should be closely monitored, and the federal government should be prepared to swiftly reverse course in case the costs begin to outweigh the benefits.

ecently, Representative Bobby Scott (D-VA) introduced the Raise the Wage Act of 2021, which calls for a gradual increase in the minimum wage each year so that it will eventually reach $15 in 2025. The idea of the $15 wage started in SeaTac, Washington, largely by accident, when in 2013, David Rolf, a union leader, put the measure on the city ballot to gain leverage against Alaska Airlines. Ever since, there has been a large movement for local, state, and federal government to adopt a $15 minimum wage. This seemingly accidental number, 15, has the potential to change many lives, but what does the economics literature say about the wage increase?  

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Raj Ashar is the Policy Editor at Midwestern Citizen and is a junior at the University of Michigan studying Economics. In the future he hopes to attend law school and combine his interest in economics with the law. Outside of MC, Raj enjoys watching movies and running.