CBO's Minimum Wage Report
Updated: Feb 11, 2020
Dear Clients & Friends,
The Congressional Budget Office (CBO) recently released new research regarding a potential rise in the federal minimum wage. We at MORWM support higher minimum wages and efforts to reduce the American wealth gap. Many of our clients recognize that the enormity of our current and growing wealth gap is not conducive to a healthy economic or social culture. However, this is a more complicated problem than many appreciate. Therefore, we thought that this new research would be a good topic to briefly discuss this weekend.
The federal minimum wage (FMW), currently $7.25 per hour, hasn't increased since 2009—the longest stretch with no increases since 1938 when the minimum wage was created. Several presidential candidates, as well as proposed House Bill H.R. 582 (the Raise the Wage Act), would raise the FMW. What effect would a wage increase have on wage earners, families, employers, and the economy?
The CBO released a new report that examined the impact of raising the federal minimum wage to $10, $12, or $15 per hour by 2025 and how this would affect employment and family income.
According to the CBO, the $15 option would be the most impactful. This raise would boost the wages of 17 million workers who would otherwise earn less than $15 per hour. Another 10 million workers who currently earn slightly more than $15 per hour might see their wages rise as well. The number of people who earn an annual income that falls below the poverty threshold would decrease by 1.3 million by 2025. However, the CBO estimates that approximately 1.3 million other workers would become jobless. There is also a two-thirds chance that between 0 and 3.7 million workers could be affected by a change in employment status, such as full time to part-time, etc.
To summarize the CBO's findings, the $15 option would:
Boost workers' earnings through higher wages, though some of these higher earnings would be offset by higher rates of joblessness
Reduce business income and raise prices as higher labor costs are absorbed by business owners and passed on to consumers
Slightly reduce the nation's output as a result of the reduction in employment, with a corresponding decline in the nation's stock of capital (such as buildings, machines, and technologies)
The CBO report seems to indicate that a wage increase would have both positive and negative ramifications. Based on the above possible outcomes and the CBO's estimate of the median effect on employment, the $15 option would reduce total real (inflation-adjusted) family income in 2025 by $9 billion, or 0.1%. The cost of the wage increase could cause a reduction in the labor force. In addition, higher-income earners who buy more goods and services could see the prices of those commodities increase. On the other hand, more families would have incomes that are above the federal poverty level. It should be noted that there is considerable uncertainty about the size of any option's effect on employment, because future wage growth under current law is uncertain, and because the responsiveness of employment to an increase in the minimum wage is unclear.
Many believe that the positive effects of an increase in the minimum wage will outlast the negative effects. The law of supply and demand dictates that business owners and executives of larger corporations may, over time, have to price products and services in line with foreign challengers in order to be competitive. This may mean that the executives would have to accept lower personal income to offset the impact of higher wages. In addition, although a minimum wage increase may reduce average family income by $9 billion by 2025, ultra-high income earners who raise the “average” may absorb the majority of that reduction.
As we mentioned in our introduction, MOR Wealth Management is in favor of higher minimum wages and efforts to reduce the crippling American wealth gap. However, we must recognize and appreciate that such legislation does not come without its challenges.
We wish everyone a wonderful weekend.
-Your crew at MORWM
Matthew Ramer, AIF® Principal, Financial Advisor MOR Wealth Management, LLC
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