With 60% of Americans living paycheck to paycheck, most U.S. households could use a raise. But an arbitrary, one-size-fits-all increase in the minimum wage imposed by lawmakers in Washington would only exacerbate the struggles of these households.
According to a new analysis by the Congressional Budget Office, proposed legislation to increase the federal minimum wage to $17 per hour by 2029, a jump of 134%, would reduce employment and increase prices, interest rates, and federal deficits.
Any one of these consequences of the so-called Raise the Wage Act of 2023 would be bad news; all four together would add insult to injury for struggling workers and families.
1. Job Losses
Already, 1.9 million fewer people are employed today than if the employment-to-population ratio were what it was in February 2020. The report from the nonpartisan Congressional Budget Office estimates that a $17 minimum wage would cost 700,000 jobs, mostly among low-income workers.
Although 700,000 was the CBO’s estimate of average job losses, the agency also calculated a 33% chance that job losses would exceed 1.4 million workers.
Those in minimum wage jobs can’t afford a middle-class lifestyle, and they certainly can’t sustain a family (fortunately, only 0.07% of all workers are single parents earning the minimum wage and living in poverty).
But minimum wage jobs do play an important role as a steppingstone into the workforce and an opportunity for individuals with disabilities, limited English, or a criminal record to get their foot in the door.
A massive hike in the minimum wage could act as a barrier to entry to the workforce for many young and disadvantaged workers, leading not only to temporary unemployment but potentially lifelong consequences. Of the 700,000 people who would be jobless in 2033 because of the proposed increase in the minimum wage, CBO estimates that half (including disproportionately younger and less educated workers) would have dropped out of the labor force entirely.
At the macroeconomic level, fewer Americans working means less output and a smaller economy. And it means lower income tax revenues and higher welfare spending, a double negative for the federal budget.
2. Higher Deficits
Job losses will lead to increased welfare spending on programs such as unemployment insurance. Wage gains for other low-income workers would partially offset higher welfare spending by reducing other program expenditures, but those wage gains also would increase consumer prices and the costs of welfare benefits.
Spending on federal health care programs, for example, would rise by $27 billion between 2024-2033, mostly due to higher health care costs.
In total, the Congressional Budget Office estimates that federal deficits would increase by $59 billion between 2024 and 2033 because of the proposed hike in the federal minimum wage. In contrast to past estimates related to minimum wage increases, the CBO includes a dynamic analysis to take into account higher prices and interest rates that would add $13 billion to the $46 billion static estimate.
3. Higher Prices
Already, excessive inflation caused by massive government spending has caused the average worker to lose nearly $5,600 in purchasing power from his or her paychecks over the past three years.
A $17 minimum wage would lead to further price increases because when employers have to pay people more to do the same job, they have to raise their prices (or reduce their workforces, take away worker benefits, or forgo investments in the business).
This price effect was evident in the government’s excessive and easily available pandemic unemployment insurance bonuses, which caused employers to have to pay workers more to do the same thing. Prices for things that include significant labor costs shot up. For example, the cost of food at restaurants is up 25% since the COVID-19 pandemic.
My analysis of a $17 minimum wage hike found that it would increase child care costs by 20% across America. The CBO report notes that health care and long-term care costs would rise significantly with a $17 minimum wage.
Although recipients of government benefits such as Social Security and Disability Insurance would receive adjustments for inflation, those adjustments would mean even higher budget deficits.
4. Higher Interest Rates
Over the past three years, mortgage interest rates nearly tripled as the Federal Reserve raised rates to combat the government’s spending-induced inflation. Combined with the surge in home prices, the monthly mortgage payment on a median-priced home has more than doubled, from $1,092 in 2020 to $2,286 today.
The report from the Congressional Budget Office estimates that interest rates would rise slightly under the proposed hike in the minimum wage to $17 an hour: “The Federal Reserve would adjust short-term interest rates to counteract the increase in overall demand and inflation stemming from the rising minimum wage.”
Even small interest rate increases have significant effects on large loans such as home mortgages. And for the federal government’s nearly $34 trillion debt, the CBO estimates that a $17 minimum wage would add $14 billion in 10-year interest costs.
Rising wages are a great thing when they occur because workers gain education and experience that make them more productive. And with the cost of everything from gas and groceries to housing and health care squeezing workers’ paychecks and households’ budgets, most Americans could use a pay raise.
But government-imposed wage increases don’t create new income; they only redistribute it.
If policymakers want to help increase workers’ wages and expand their opportunities without taking away jobs and increasing costs, they first should seek to eliminate government-created barriers to work and higher wages.
This means eliminating unnecessary regulations that drive up business costs and reduce workers’ wages; expanding alternative and low-cost education options such as apprenticeships; and opening more doors to flexible and independent work opportunities.
When these policies of less government intervention were pursued from 2017 through 2019, real earnings increased by 9.9% for low-income workers (at the 10th percentile of earnings) and by 4.8% for the median worker.
In contrast, amid massive government spending and a slew of new labor regulations from 2021 through 2023, real earnings increased only 4.8% for low-income workers and the earnings of a median worker fell 1%.
When it comes to raising workers’ wages, less government intervention equals more wage growth.
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