Minnesota’s Economic News — W/E 9/24/21
Labor market Pine Journal: Twin Ports area leads Minnesota with highest annual job growth rate Marshall Radio: MN Adds Jobs In August, Unemployment Drops Hometown Focus: Job growth continues in…
In 2019, when the Raise the Wage Act was initially introduced, the Congressional Budget Office (CBO) analyzed how implementing the bill would affect the economy. The CBO concluded that raising the minimum wage would lead to a loss of 1.3 million jobs, among other effects.
Quite recently, the CBO announced an updated report that takes into account COVID-19’s impact on the economy. The new report specifically analyzes the recently proposed Raise the Wage Act of 2021. And according to the new report by the CBO, the results are more or less the same.
In an average week in 2025, the year when the minimum wage would reach $15 per hour, 17 million workers whose wages would otherwise be below $15 per hour would be directly affected, and many of the 10 million workers whose wages would otherwise be slightly above that wage rate would also be affected. At that time, the effects on workers and their families would include the following:
Employment would be reduced by 1.4 million workers, or 0.9 percent, according to CBO’s average estimate;
and The number of people in poverty would be reduced by 0.9 million.
It’s obvious there are huge tradeoffs to such a policy as raising the minimum wage. In contrast to what legislators try to make it seem, raising the minimum wage is not all rosy. It does not only raise wages. As the majority of research concludes, raising the minimum wage has net negative employment effects. Furthermore, most of these disadvantages accrue to low-skilled workers, whom ironically such a policy is intended to help.
While most research on minimum wage has focused on employment effects, the new report by the CBO also touches on other significant trends that would follow a higher minimum wage. The CBO, for instance, analyzed how raising the minimum wage would affect prices.
In CBO’s assessment, the Raise the Wage Act of 2021 would change the relative prices of goods and services. The largest price increases, relative to the average increase, would be for goods or services whose production required a larger-than-average share of low-wage work, such as food prepared in restaurants. For goods and services that used less low-wage labor in their supply chains, prices would rise less.
To the extent that price increases are high enough, they may completely erase wage gains made by low-income workers. In this case, real wages would remain the same among workers while jobs would go down. This is even more concerning when we consider the fact that low-income workers tend to spend their money on goods and services that are very labor-intensive. Take, for instance, the study that found that Mcdonald’s passed on almost its entire cost of raising the minimum wage to customers through higher prices effectively reducing the real wages of workers.
And what about some of the effects of raising the minimum wage that are harder to catch in an economic model? Things like reduced work hours and fewer fringe benefits or job perks. In order to offset rising labor costs, employers may divert funds away from activities that provide for comfortable working conditions. In other instances, higher raises can translate to harder work. Raising the minimum wage may also incentivize firms to reduce new hires without increasing layoffs. In some instances, firms may also choose to automate their services.
Much like every policy decision, raising the minimum wage is not without costs. In the case of the minimum wage, these costs include massive job losses, higher prices as well as other not so easily observed impacts that affect the job market. Worse yet, the complicated nature of the economy may mean most studies understate the costs of raising the minimum wage.