CBO: A $15 minimum wage will lead to 1.4 million job losses

When the Raise the Wage Act was initially introduced in 2018, the Congressional Budget Office (CBO) analyzed the potential economic impact of implementing the bill. The CBO concluded that raising the minimum wage would, among other things,  lead to 1.3 million job losses.

Recently, the CBO released an updated report that takes into account the impact of COVID-19 on the economy. The new report specifically analyzes the recently proposed Raise the Wage Act of 2021.

The results are more or less the same, but with higher job losses.

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 minimum wage hikes. In contrast to what legislators claim, raising the minimum wage is not a zero-cost policy.

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.

Minimum wage effects go beyond job losses

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.

Ironically, if high enough,  price increases would completely erase wage gains made by low-income workers, in which case, real wages would remain the same while employment would decline. 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 to customers its entire cost of raising the minimum wage to customers, 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. To offset rising labor costs, employers may divert funds away from activities that provide for comfortable working conditions. In other instances, higher raises can induce businesses to make employees work harder. 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.

No solutions, only trade-offs

Much like every policy decision, raising the minimum wage is not without costs.

Minimum wage hikes, while they may raise income for a few workers, kill jobs and raise the prices of goods and services.