How Increasing the Federal Minimum Wage Could Affect Employment and Family Income

Federal minimum wage: Options for the target amount for the hourly minimum wage range from $10 to $15 (in $1 increments).

The federal minimum wage would rise by varying amounts each year until it reached the target amount in the year specified for full implementation. For the default policy based on the Raise the Wage Act of 2021, the minimum wage would be $9.50 in 2023, $11.00 in 2024, $12.50 in 2025, $14.00 in 2026, and $15.00 in 2027 and would be indexed to changes in median wages thereafter.

Subminimum wage for tipped workers: Cash earnings (excluding tips) must exceed $2.13 per hour under current law, and total hourly earnings (including tips) must equal the federal minimum wage.

Users of this interactive tool can leave the subminimum wage unchanged, increase it by varying amounts each year until it reaches 50 percent of the federal minimum wage, or increase it by varying amounts each year until it matches the federal minimum wage.

For the default policy based on the Raise the Wage Act of 2021, the subminimum wage would be $4.95 in 2023, $6.95 in 2024, $8.95 in 2025, $10.95 in 2026, $12.95 in 2027, $14.95 in 2028, and equal to the federal minimum wage thereafter.

In each case, the percentage difference between the federal minimum wage and the subminimum wage would be maintained after the implementation period ends.

Year in which the specified increase would be fully implemented: Like previous increases in the minimum wage, the options presented here would take a number of years to be fully implemented.

Users of this interactive tool can leave the minimum wage unchanged after the end of the phase-in period or change it in one of two ways.

Further adjustments to the minimum wage: Indexing the minimum wage means automatically adjusting it after it reaches the target amount. Past increases in the federal minimum wage have not been indexed, so the value of those increases has been eroded by inflation.

Users of this interactive tool can index minimum wages to the consumer price index (CPI, a common measure of the cost of living) or index minimum wages to median hourly wages.

Historically, median hourly wages have grown faster than the CPI, and CBO expects that pattern to continue over the next 10 years (starting in 2023). As a consequence, indexing the minimum wage to median hourly wages would lead to slightly larger effects on employment, wages, and family income.

Directly affected workers. Workers whose wages would otherwise be between the previously applicable minimum (state or federal) and the proposed minimum and who would either be jobless or see increases in their earnings in an average week.

Potentially affected workers. Workers whose hourly wages are between the proposed minimum and that amount plus 50 percent of the increase in the federal minimum wage above their previously applicable (federal, state, or local) minimum wage. Only some of those workers would have increased earnings.

Income group. Families are grouped on the basis of their income relative to the poverty threshold. The groups are based on CBO’s projections of family income (in 2022 dollars) in 2026. CBO projects that in 2026, average income will be $12,500 for families with income less than the poverty threshold; $33,500 for families with income 1.0 to 1.49 times the poverty threshold; $47,400 for families with income 1.5 to 1.99 times the poverty threshold; $68,400 for families with income 2.0 to 2.99 times the poverty threshold; $117,100 for families with income 3.0 to 5.99 times the poverty threshold; and $297,900 for families with income 6.0 or more times the poverty threshold.

Range of likely outcomes. In CBO’s assessment, there is a two-thirds chance that the effect would be within that range.

Real family income. This measure constitutes before-tax family cash income (primarily earnings but also unemployment compensation, cash benefits from public assistance programs, and other forms of income), expressed in 2022 dollars. Changes in real family income include increases in earnings for workers who receive a higher wage, decreases in earnings for workers who lose their job, losses in income for business owners, and decreases in purchasing power because of increases in prices.

Subminimum wages for teenagers and disabled workers. For teenage workers, the minimum wage is currently $4.25 per hour during their first 90 days of employment; for disabled workers whose employers are certified by the Department of Labor, wages are based on analyses of prevailing wages and worker productivity.

EFFECTS ON EMPLOYMENT

How would increasing the minimum wage affect employment? Raising the minimum wage would increase the cost of employing low-wage workers. As a result, some employers would employ fewer workers than they would have under a lower minimum wage. However, for certain workers or in some circumstances, employment could increase.

Changes in employment would be seen in the number of jobless, not just unemployed, workers. Jobless workers include those who have dropped out of the labor force (for example, because they believe no jobs are available for them) as well as those who are searching for work.

How did CBO estimate effects on employment? In CBO’s analysis, the size of the effects depends on the number of workers affected by the increase in the minimum wage, the changes in wages induced by the higher minimum, and the responsiveness of employment to those changes in wages. Effects would generally be greater if the minimum-wage change affected more workers, if it led to larger mandated increases for directly affected workers, if firms had more time to respond (for example, because the change was phased in over a longer period), and if the minimum wage was indexed to inflation or wage growth.

For details of CBO’s analysis, see Appendix A of CBO’s July 2019 report The Effects on Employment and Family Income of Increasing the Federal Minimum Wage. Although CBO’s economic and budget projections have changed since that analysis was completed, CBO has not adjusted its methods for estimating how employment would respond to a higher minimum wage. That is partly because CBO projects that employment will be near the level that it was at in the baseline projections underlying the 2019 report.

If workers lost their jobs because of a minimum-wage increase, how long would they stay jobless? At one extreme, an increase in the minimum wage could put a small group of workers out of work indefinitely so that they never benefited from higher wages. At the other extreme, a large group of workers might shuffle regularly in and out of employment, experiencing short spells of joblessness but receiving higher wages during the weeks they were employed.

In analyzing the effects of joblessness on poverty, CBO used its estimates of the distribution of durations of unemployment for the 2000–2020 period to assign directly affected workers either no joblessness or a duration of joblessness within the projection year that was randomly chosen from that distribution. Thus, some workers in CBO’s analysis are out of work for nearly an entire year, whereas others are jobless for shorter—sometimes much shorter—periods.

EFFECTS ON INCOME

How would increasing the minimum wage affect family income? By boosting the income of low-wage workers who have jobs, a higher minimum wage would raise their families’ real income (that is, income adjusted to remove the effects of inflation), lifting some of those families out of poverty. However, income would fall for some families because other workers would not be employed and because business owners would have to absorb at least some of the higher costs of labor. For those reasons, a minimum-wage increase would cause a net reduction in average family income.

How did CBO estimate the effects on family income? CBO projected the distribution of family income in future years and then combined those forecasts with estimates of the effects on wage rates, employment, business income, and prices. Effects on wage rates include increases in the wages of workers who would have earned slightly more than the proposed minimum wage in the absence of the policy. Losses in business owners’ income and consumers’ purchasing power would be partly offset by an increase in the productivity of workers who received higher wages. That increase in productivity might occur through various channels, such as a reduction in employee turnover. (For details, see The Effects on Employment and Family Income of Increasing the Federal Minimum Wage.)

How would increasing the minimum wage affect the number of people in poverty? By boosting the income of low-wage workers with jobs, a higher minimum wage would lift some families’ income above the poverty threshold and thereby reduce the number of people in poverty. But low-wage workers who lost employment would see their earnings decrease, and in some cases their family income would fall below the poverty threshold. The first effect would tend to be larger than the second, so the number of people in poverty would generally fall.

How did CBO estimate the effects on the number of people in poverty? CBO projected the distribution of poverty in future years by using the same methods it used to project the distribution of family income and by applying the same definitions of income and poverty thresholds that the Census Bureau uses to determine the official poverty rate.

How certain are these outcomes? The size of any option’s effects on employment and family income are very uncertain, for two main reasons.

First, future wage growth under current law is uncertain. If wages grow faster than CBO projects, then wages in future years will be higher than CBO anticipates and increases in the federal minimum wage would have smaller effects. If wages grew more slowly than CBO projects, the effects would be larger.

Second, the responsiveness of employment to an increase in the minimum wage is uncertain. If employment is more responsive than CBO expects, then increases in the minimum wage would lead to larger declines in employment. By contrast, if employment is less responsive than CBO expects, the declines would be smaller. Findings in the research literature about how changes in the federal minimum wage affect employment vary widely. Many studies have found little or no effect, but many others have found substantial reductions in employment.

Would changing the minimum wage have other effects? Studies have examined the link between the minimum wage and a range of other outcomes, including labor force outcomes such as labor force participation (whether a person is working or actively seeking a job); health outcomes such as depression, suicide, and obesity; education outcomes such as school completion and job training; and social outcomes such as crime. CBO did not examine those other possible outcomes in this analysis. However, a list of sources for more information is available in Appendix B of The Effects on Employment and Family Income of Increasing the Federal Minimum Wage.

In The Budgetary Effects of the Raise the Wage Act of 2021, CBO estimated how an option for increasing the minimum wage to $15 would affect the federal budget. That analysis incorporated the effects of changes in macroeconomic factors, such as inflation and aggregate income.

How have updates changed the estimates generated by this tool? For two main reasons, outcomes generated by the current version of the tool differ from those in the April 2021 version. First, CBO now projects faster nominal wage growth under current law, so any given increase in the minimum wage would generally have a smaller effect on wages, and therefore on employment and family income.

Second, the options would be initially implemented in 2023, not 2022, and they would be fully implemented on January 1 of 2026, 2027, or 2028 (one year later than in the 2021 release). Wages would grow over that additional year—from 2026 to 2027, for example—further reducing the effect of any given increase in the minimum wage.

CBO made other updates to the tool to reflect baseline policy changes, newer data, and refinements to estimates of weekly earnings, but the effects of those changes are much smaller than the effects resulting from the higher rate of wage growth and later implementation of the policies.

The estimates shown here are based on CBO’s economic projections published in May 2022 and reflect economic developments through March 2, 2022. They also include the effects of legislation enacted through April 8, 2022. In addition, for this analysis, CBO has incorporated the effects of Executive Order 14026, issued by President Biden on April 27, 2021, which increased the minimum wage for federal contractors to $15 on February 1, 2022. In later years, the minimum wage for federal contractors will increase by the change in the consumer price index, reaching $17.10 in 2027. As a result of that increase, fewer workers would be affected by a higher minimum wage that was implemented for a broader group of workers.

How does the default policy option differ from the Raise the Wage Act? The default option in this interactive closely models the Raise the Wage Act of 2021, which CBO examined in its February 2021 report. The main difference is that in this version of the interactive, the first incremental increase occurs on January 1, 2023, whereas in the February 2021 report, it was scheduled to occur on June 1, 2021.