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

The federal minimum wage of $7.25 per hour has not changed since 2009. Increasing it would raise the earnings and family income of most low-wage workers, lifting some families out of poverty—but it would cause other low-wage workers to become jobless, and their family income would fall.

This interactive tool allows users to explore the effects of policies that would increase the federal minimum wage, including a policy based on the Raise the Wage Act of 2021 (S. 53), which CBO analyzed in The Budgetary Effects of the Raise the Wage Act of 2021. Users can also create custom policy options to examine how different approaches to changing the minimum wage would affect earnings, employment, family income, and poverty.

Minimum Wage [?]

$15

Minimum Cash Wage for Tipped Workers [?]

Target Year for Full Implementation [?]

2026

Adjustments After Target Year [?]

OPTION

Raise the minimum wage to $ by The subminimums for teenagers and disabled workers are eliminated.

Minimum Hourly Wages

Dollars

Minimum Wage Cash Wage for Tipped Workers

Change in Employment in an Average Week

Millions of Jobs

Median Estimate Range of Likely Outcomes

Change in the Number of People in Poverty

Millions

Median Estimate Range of Likely Outcomes

Change in the Number of People Entering and Leaving Poverty

Millions

Overall Change in Real Family Income

Billions of 2021 Dollars

Distribution of Changes in Real Family Income, by Income Group, 2026

Billions of 2021 Dollars

Average Percentage Change in Real Family Income, by Income Group

Percentage Change

Size and Scope of Increases in Wages

Average Mandated Percentage Increase in Wages

Effects on Employment, Income, and Poverty

  2026 2028 2031

Note: Where an asterisk appears for a value, it represents an amount that is not zero but would round to zero.

Aspects of the Policy Options

Federal Minimum Wage: The target amount for the hourly minimum wage. Options range from $10 to $15 (in $1 increments). The federal minimum would rise by varying amounts each year until it reached the target amount in the year specified for full implementation. For the policy based on the Raise the Wage Act of 2021, the minimum wage would be $9.50 in 2022, $11.00 in 2023, $12.50 in 2024, $14.00 in 2025, and $15.00 in 2026 and would be indexed to changes in median wages thereafter.

Subminimum Wage for Tipped Workers: 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 regular minimum wage.

In this interactive tool, users can:

  • Leave the subminimum wage unchanged,
  • Increase it by varying amounts each year until it reaches 50 percent of the regular minimum wage, or
  • Increase it by varying amounts each year until it matches the regular minimum wage. For the policy based on the Raise the Wage Act of 2021, the subminimum wage would be $4.95 in 2022, $6.95 in 2023, $8.95 in 2024, $10.95 in 2025, $12.95 in 2026, $14.95 in 2027, and equal to the regular minimum thereafter.

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

Year 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.

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.

In this interactive tool, users can:

  • Leave the minimums unchanged after the end of the phase-in period;
  • 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 wage rates have grown faster than the CPI, and CBO expects that pattern to continue over the next 10 years. As a consequence, indexing the minimum wage to median hourly wage rates leads to slightly larger effects on employment, wages, and family income.

FAQs

The 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 certain 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 on 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 the 2020 coronavirus pandemic and the current recession affected CBO’s baseline projections of the budget and economy over the 2021–2030 period, CBO has not adjusted its methods for estimating how employment would respond to a higher minimum wage, in part because CBO projects that in a few years employment will be near the level that it was 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 joblessness for short spells 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 of time.

The Effects on Income

How would increasing the minimum wage affect family income? By boosting the income of low-wage workers who had jobs, a higher minimum wage would raise their families’ real income, 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 effects on family income? CBO projected the distribution of family income in future years and then combined those forecasts with estimates of 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 a variety of channels, such as a reduction in 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 effects on the number of people in poverty? CBO projected the distribution of poverty in future years using the same methods it used to project the distribution of family income, applying the same definitions of income and poverty thresholds that the Census Bureau uses to determine the official poverty rate. CBO projects that in 2025, the poverty threshold (in 2021 dollars) will be $21,260 for a family of three and $26,850 for a family of four.

Uncertainty and Other Effects

How certain are these outcomes? There is considerable uncertainty about the size of any option’s effects on employment and family income. There are two main reasons why. 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 grow more slowly than CBO projects, the effects would be larger.

Second, there is considerable uncertainty about the responsiveness of employment to an increase in the minimum wage. 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 minimum wages and a range of outcomes other than employment and family income, 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 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.

Changes From CBO’s Earlier Studies

How have updates changed the estimates generated by this tool? For two main reasons, outcomes in the current version of the tool are different from those in the original version released in 2019. First, the options would begin to be implemented in 2022, not 2020, although they would be fully implemented on January 1 of 2025, 2026, or 2027, as in the earlier version. Wages would grow over time 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, if it happened later. Second, the tool now presents mean (not median) estimates from distributions of projected outcomes because changes in mean wages are the most important contributor to the projections of budgetary effects. Because those distributions include some very large values, the means are generally larger than the medians. For a more complete discussion of these changes, see The Budgetary Effects of the Raise the Wage Act of 2021.

CBO also modified the size of incremental changes to the minimum wage leading up to the target minimum dictated by a given policy. In the original version of the tool, the total increase in the minimum wage was allocated evenly across the years of a policy’s implementation. In the updated version, yearly minimum-wage increases are proportional to those mandated by the Raise the Wage Act of 2021. As a result, the increases are largest in the first year of a policy’s implementation.

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. In particular, under the default option, the standard minimum reaches $15 per hour four years after the first incremental increase, the subminimum for tipped workers reaches parity with the regular minimum two years after the regular minimum reaches $15, and after reaching their targets, both minimums are indexed to changes in median hourly wages. The main difference is that in this interactive, the first incremental increase occurs on January 1, 2022, whereas in the February 2021 report, it was scheduled to occur on June 1, 2021.

Definitions

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.

Income group. Based on CBO’s projections of family income (in 2021 dollars) in 2025. CBO projects that in 2025, average income will be $11,000 for families with income less than the poverty threshold; $29,200 for families with income 1.0 to 1.49 times the poverty threshold; $40,500 for families with income 1.5 to 1.99 times the poverty threshold; $57,000 for families with income 2.0 to 2.99 times the poverty threshold; $97,900 for families with income 3.0 to 5.99 times the poverty threshold; and $246,000 for families with income 6.0 or more times the poverty threshold.

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 above their previously applicable (federal, state, or local) minimum wage. Only some of those workers would have increased earnings.

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

Real family income. Before-tax family cash income (primarily earnings but also unemployment compensation, cash benefits from public assistance programs, and other forms of income), expressed in 2021 dollars. Changes in real family income include increases in earnings for workers receiving a higher wage, decreases in earnings for workers made jobless, losses in income for business owners, and decreases in purchasing power because of increases in prices.

Subminimums for teenagers and disabled workers. For teenage workers, 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 based on analyses of prevailing wages and worker productivity.

Data and Supplemental Information

Feedback

CBO continually seeks feedback to make its work as useful as possible. Please send any comments to communications@cbo.gov.

About This Interactive Tool

Nabeel Alsalam, William Carrington, Justin Falk, and Kevin Perese produced the estimates for this interactive tool with guidance from Molly Dahl and Joseph Kile. Nabeel Alsalam, William Carrington, Justin Falk, Junghoon Lee, and Brooks Pierce updated the tool with guidance from Xiaotong Niu in April 2021. Jeffrey Kling and Robert Sunshine reviewed it, Christine Browne edited it, Casey Labrack developed it, and Annette Kalicki integrated it into the website and prepared it for release.

This page was last updated on April 5, 2021; the underlying data are based on CBO’s February 2021 economic forecast.