President Biden recently proposed a gradual increase of the federal minimum wage from $7.25 per hour to $15 per hour over a period of four years. Thus the federal minimum wage would approximately double. The proposal by Biden came as part of his coronavirus relief package.
The Congressional Budget Office has done a study of the proposal and found that 1.4 million jobs would be lost as a result of its being enacted.
On the other hand, the same study concluded that 900,000 people would be lifted out of poverty due to the proposal. There is thus a substantial trade-off, but it is worse if 1.4 million people have no job at all than if 900,000 are lifted out of poverty.
The CBO also wrote that there would be a $54 billion federal government deficit increase from 2021-2031, including on spending for Social Security. Initial Social Security benefits are tied to economy-wide average wages.
Raising the federal minimum wage to $15 per hour would also cause prices for consumers to rise. As the CBO notes:
“Higher wages would increase the cost to employers of producing goods and services. Employers would pass some of those increased costs on to consumers in the form of higher prices, and those higher prices, in turn, would lead consumers to purchase fewer goods and services. Employers would consequently produce fewer goods and services, and as a result, they would tend to reduce their employment of workers at all wage levels.”
Adam Michel, a senior policy analyst at The Heritage Foundation, has written that a $15 minimum wage “would backfire in a major way if passed into law.”
“It would hurt lower-skilled individuals the most, including teenagers, immigrants, and those without a high school degree. And women, who hold more low-wage jobs than men, would be hurt the most, accounting for more than 60% of the resulting lay-offs.”
“There is now ample evidence that pro-growth policies, like business tax cuts, fuel wage growth and new hiring. Research on the minimum wage tells the opposite story: one of job loss and wage stagnation.
“The economic fact is that when the government forces businesses to pay an employee a mandated hourly wage, businesses are left with few options: Cut hours, lay off workers, or reduce benefits — or some combination of these.”
Labor economist Joseph Sabia wrote in a 2014 bulletin for the Cato Institute:
“While alleviating poverty is a widely shared goal, raising the minimum wage is unlikely to achieve that end. In reality, it is more likely to result in making many low-skilled workers worse off. The minimum wage fails to reduce net poverty because of its adverse effects on employment and poor ability to target workers living in households below the poverty threshold.”
Minimum wages are touted by liberal politicians as effective tools in reducing income inequality. However, raising the minimum wage to $15 an hour would bring more than one million workers unemployment, the ultimate form of inequality.
Income inequality (and its twin, wealth inequality) have in recent years been a major target of liberal politicians. The minimum wage would reduce income inequality for some workers, but the costs for the unemployed workers would cancel that out.
Businesses should be free to pay as much or as little as they are willing to for the work provided. The salaries of CEOs should not be capped, and neither should workers who would be paid under the minimum wage in a free market be put out of employment by a massive minimum wage increase.
The minimum wage seems like a great idea, and it certainly appeals to voters. Unfortunately, Biden’s proposal to approximately double the federal minimum wage could have a tremendously harmful effect on businesses and those who find themselves out of a job due to it. Let us hope that this major harm to the U.S. economy is avoided.
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