President Biden and many members of Congress support an increase in the minimum wage from $7.25 per hour to $15 per hour. The $7.25 rate has been in effect since 2009, and many states and municipalities have already increased the minimum wage for their workers since then.
Under the basic supply and demand model, an increase in cost will lead to a decrease in demand. However, economists also talk about the income effect and the substitution effect. As it applies to labor costs, the income effect means that increasing wages will give consumers more money to spend, and that’s good for employment. Low wage workers generally can’t afford to save money, so any increase in income tends to go right back into the economy.
The substitution effect means that as costs go up, people will look for ways to do things cheaper, and that’s bad for employment. Some businesses can no longer afford to operate, and others find ways to cut out workers. But even with the minimum wage at $7.25, self-checkout counters and automated customer service systems have replaced workers in many companies.
So what’s likely to happen? In 2019, the Congressional Budget Office released a report that estimated the effects of a minimum wage increase on employment levels and on family poverty. Their models showed that a $15 minimum wage would be likely to reduce employment by 1.3 million by 2025. A $12 minimum wage would have a smaller effect, reducing employment by 0.3 million, and a $10 minimum wage would have no effect.
As for a change in the number of people in poverty, a $15 minimum wage would reduce it by 1.3 million, a $12 minimum wage by 0.4 million and a $10 minimum wage would have no effect.
One issue is that an increase in the minimum wage affects both people who currently earn the minimum wage and those who currently make an amount between the old minimum wage and the new minimum wage. With a $15 minimum wage, anyone making $13 would get a raise. The $13-an-hour worker would not be affected by a $12 minimum.
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