The Costs and Benefits of a $15 Federal Minimum Wage

Biden has identified raising the minimum wage as a key goal of his administration, but economists and lawmakers disagree on the potential impact. WSJ asked two economists and a minimum-wage worker what the costs and benefits of a $15 minimum wage might be. Photo: Bill Clark/Congressional Quarterly/Zuma Press

Video Transcript

JOE BIDEN: No one should work 40 hours a week who live in poverty.

NANCY PELOSI: We will not rest until we pass the $15 minimum wage.

MITCH MCCONNELL Nonpartisan experts say it would send more people to the unemployment line than it would lift out of poverty.

- The debate over whether to raise the minimum wage has long been a political sticking point in Washington. 11 years after the last increase of the federal minimum wage to $7.25 an hour, lawmakers have introduced legislation that would raise it over time to $15 by 2025. This would more than double it, bringing the minimum wage to its highest level ever when adjusted for inflation.

This uncharted territory has raised questions about its effects on jobs, businesses, and the economy overall. To understand the potential impact of such an increase, the Wall Street Journal asked two economists, as well as a minimum wage worker, what the risks and benefits of a $15 minimum wage would be. 21-year-old Porche Vann is a minimum wage worker in Fayetteville, North Carolina. She took a job in food service in April 2020 she lost her full-time nanny position due to the coronavirus pandemic. She has become active in the Fight for $15 movement advocating for higher wages.

PORCHE VANN: I can't even, you know, put a roof over my head because of my job pay. It's not even about the job. It's how much the job is paying.

- For workers like Porche Vann, a $15 minimum wage would put more money in their pockets. A report by the nonpartisan Congressional Budget Office found that raising the minimum wage could give 27 million workers a pay bump. But the report also says phasing it in would cost the economy about 1.4 million jobs as businesses shed workers due to increased labor costs. However, economists vary widely in their own assessments of how many jobs would be lost and what the costs and benefits may be. University of Massachusetts Amherst economist Arin Dube says the low wage labor market is able to absorb higher wages with little negative impact on jobs.

ARIN DUBE: We can go up to even 70% or 80% of the median wage-- so the minimum wage can be that high-- and still have relatively limited impact on jobs.

- But more than 3/4 of economists surveyed by the Wall Street Journal in February said a $15 minimum wage would cost the US jobs, with most saying the job loss would be less than 1 million. Michael Strain studies the US jobs and labor market at the conservative-leaning American Enterprise Institute. He believes the impact on jobs could be greater than the CBO's estimate.

MICHAEL STRAIN: An important factor here is whether or not the magnitude of job losses grows as the size of the minimum wage increase grows. The effect on employment of a large increase is larger than the effect on employment of a more modest increase. Going to $15 would be more than doubling the current federal minimum. And the evidence for what happens when you do that is much more limited because that's a policy change that we really haven't seen.

PORCHE VANN: And seeing how much you really make in these jobs and how much work you put into it. It has really affected me very negatively because now I'm having to struggle to make ends meet.

- Proponents say that higher minimum wage would alleviate the financial struggle that many low-wage workers face. The CBO report also says that a $15 minimum wage would lift 900,000 Americans out of poverty.

ARIN DUBE: They also find that a higher minimum wage leads to less reliance on food stamps and other public assistance. So roughly $0.35 on the dollar ends up actually as taxpayer savings.

PORCHE VANN: I have been thinking about going onto food stamps so that I could at least save some type of money because I won't be able to afford to eat every day and pay the rent. A $15 minimum wage would mean less stress to me because I would know that I had more money coming in to where I didn't have to stress about if I'm able to get this or if I'm able to get that.

MICHAEL STRAIN: Well, I don't think the minimum wage is a particularly effective tool in fighting poverty. And the reason for that is that a lot of poverty comes from people not having jobs. And if you don't have a job, then the minimum wage increase is not going to help you to get out of poverty.

- But some economists agree there are more targeted policy tools to alleviate poverty, like the earned income tax credit. Unlike the minimum wage, the earned income tax credit is very well targeted on low-income households. And because the earned income tax credit increases the financial rewards from working, it actually increases employment by drawing people into the workforce.

ARIN DUBE: However, when more people are searching for jobs, that tends to put a downward pressure on wages. By setting a floor, the minimum wage prevents that wage reduction from taking place, thereby working well together as policies.

- Another finding in the CBO report is that higher wages would increase the costs of producing goods and services. And some of those costs would be passed on to consumers in the form of higher prices.

ARIN DUBE: Overall, what this means is that middle and higher income consumers end up paying for raising wages for those at the bottom. I think that's a feature, not a bug.

MICHAEL STRAIN: But there are limits as to how high businesses can raise their prices. And so they'll have to figure out other ways to absorb the additional labor costs. One way they might absorb it is through hiring workers who have relatively more skills or relatively more experience. Those workers will be relatively more productive than the minimum wage workers that they had previously employed.

- But opponents have said higher wages could force some small businesses to close.

PORCHE VANN: If a company is not strong enough or has not brung in enough profit to pay their employees a reasonable amount that's above poverty, then I don't think they should be open at all.

- Proponents of the increase have pointed to the benefits a higher minimum wage can bring to reducing the racial income gap. Currently, Black workers disproportionately earn minimum wage relative to their share of all hourly workers. Recent research published by economists at the University of California Berkeley has found the extension of the minimum wage in 1967 can explain more than 20% of the reduction in the racial earnings and income gap during the Civil-Rights era.

ARIN DUBE: Any policy that tends to increase wages at the bottom will generally also tend to help people of color more because more low-wage workers tend to be people of color.

- President Biden says a minimum wage increase would deliver raises for low-wage workers, many of whom were deemed essential during the COVID-19 pandemic. But opponents, including many Republicans in Congress, say the minimum wage will increase labor costs for restaurants, stores, and small businesses already reeling from a battered economy. Polling has shown that more than 2/3 of Americans are in favor of a $15 minimum wage.

ARIN DUBE: I think the most compelling thing about timing is how long it's been that we have not raised the federal minimum wage. Having said that, I don't think I would support a very large increase in the minimum wage this year. We can pass the policy and phase it in over a number of years to deal with any uncertainties about the recovery from the COVID crisis.

PORCHE VANN: Now is the perfect time because anybody in any field who's going out every day to risk their lives and to bring whatever they're bringing to the community, I feel like they should get paid more.

- Economists acknowledge that raising the minimum wage to $15 will come with both costs and benefits and that it's important to acknowledge these trade-offs when considering the policy.