Likely Effects of a $15 Federal Minimum Wage by 2024

Thank you, Committee Chair Scott, Ranking Member Foxx and other Members of the Committee, for the opportunity to testify today about HR582, The Raise the Wage Act of 2019. I have conducted research on low-wage labor markets since I was a Harvard Ph.D. in the late 1960s. During the past decade I have published numerous studies of living and minimum wages.

HR 582 proposes to increase the federal minimum wage in six steps, from its current $7.25 level to $15 by 2024. It would gradually eliminate, by 2027, the subminimum wage for tipped workers, which has stood at $2.13 since 1991, and it would eliminate as well as the subminimum wages for youth and for workers with disabilities. The Act also calls for the federal minimum wage to be indexed annually after 2024 by the percentage increase of each year’s BLS-calculated median hourly wage.

My testimony today primarily concerns the likely effects of HR582 on the number of jobs, especially in low-wage states. I also briefly touch on whether the federal floor should vary with regional living costs and subminimum wages for tipped workers and youth. Finally, I review the important downstream positive effects of minimum wages on children and on adult physical and mental health, and how these benefits would in turn increase employment and economic growth.

My testimony does not consider the likely effects of minimum wages that would be well above the $15 level set out in HR 582. These may differ, of course.

Other witnesses have discussed the percent of workers who will get increases and the effects of these increases on higher living standards for workers and their families. I will note only that these increases will be larger among women and various racial-ethnic groups. I also note that a $15 per hour minimum wage would reduce poverty rates significantly (Dube 2018), especially in low-wage, high-poverty states. Nonetheless, our poverty measures do not adequately account for the growing costs of childcare. A $15 wage does not suffice to permit households with young children to afford organized child care for children under six—in any county in the U.S.

Much minimum wage discussion, including my own today, focuses on the effects on the number of jobs. I will argue that a $15 minimum wage will have at worst a minimal negative effect on the number of jobs. However, it is important to clarify at the outset that more pessimistic scenarios, such as a loss of say, X jobs or Y hours of work per job, do not imply that X or Y workers will never again hold jobs. Failure to make this distinction has led to considerable confusion.

Low-wage labor markets are characterized by high rates of worker turnover, with relatively short unemployment spells between jobs. A hypothetical reduction in the number of jobs will most likely slightly increase the duration of unemployment spells between jobs. As a result, some workers will end up working fewer hours per year. But even pessimistic minimum wage studies all suggest that the positive effects on hourly pay greatly exceed any earnings losses that would occur because of a reduced number of jobs or reduced number of hours per job. Putting these points together, pessimistic scenarios may imply fewer hours of week per year for some workers, but higher annual earnings among these workers.

Preview of my remarks In contrast to much commentary, I will argue today that a phased minimum wage to $15 by 2024 does lie within the range of our previous experience. Economists have conducted literally hundreds of studies based on over 160 minimum wage changes in the past thirty-five years. The best of these studies do provide a credible guide to the likely employment effects of a $15 floor. They indicate that the Act will have minimal to no adverse effects on employment and that they will have substantial positive dynamic effects on the lowest-wage areas of the U.S.

Why would minimum wage increases up to $15 have minimal negative effects? The answer requires examining empirically which industries will experience the greatest cost increases, how much they will raise their prices to absorb the increase, and the responses of consumers to those price increases. The answer also involves the extent to which workers receiving pay increases will want to increase their working hours and increase their spending on consumer goods. Automation is much less of a factor, because so much automation is happening anyway, as the costs of technology have fallen so much in recent decades.

Minimum wage effects are concentrated in a small number of industries, most notably restaurants and retail, but also farming, janitorial services, security guards, home health care and residential and nursing care homes for the elderly and childcare. Minimum wage costs are mainly absorbed through slightly higher prices in these industries, by increased spending by low-income households and– for eldercare and child care– by increased public funding, most of it federal.

A $15 minimum wages will increase costs for the lowest-paying manufacturing industries, such as apparel and wood furniture. Since the latitude to increase prices is more limited in these industries, some jobs may move elsewhere. The amount of relocation will be limited by the transportation costs of moving durable finished goods from more distant locations. My analysis of recent manufacturing job trends indicates that these effects will be modest, even in such a low-wage state as Mississippi, in large part because the number of remaining low-wage manufacturing jobs in these states is quite small.

On the plus side, a $15 minimum wage will generate a substantial economic stimulus because of the increased purchasing power for consumption. These effects, which will be greatest in the lowest-wage states, will offset employment loss among low-wage manufacturing industries. The lowest-wage states will also experience lower outmigration and hence become more attractive locations for investment. Workers in these states will also be healthier, more able to enter the workforce and to be more productive workers.

The greater positive effects for the lowest-wage states suggest the advantages of retaining a single national floor. Regional minimum wage differentials would have the disadvantage of locking in current inequality between higher and lower-wage areas. Subminimum wages do not accomplish their goals of increasing employment.

Minimum wage increases have substantial beneficial downstream effects on children and adults. They reduce child neglect and poverty and improve child educational outcomes. They also reduce adult smoking rates, absenteeism from work for health reasons and obesity. For example, a ten percent increase in the minimum wage would lead to 770 fewer suicides per year. These important downstream effects suggest that minimum wage policy should be evaluated, as are most other programs, on criteria that are broader than their effects on employment and government budgets. Moreover, a healthier population is also a more economically active and productive population. Health benefits can therefore translate over time in further positive effects of minimum wages.