The Impact of a $12 Federal Minimum Wage

The “Raise the Wage Act,” introduced by Sen. Patty Murray (D-CA) and Rep. Bobby Scott (D-VA) in March 2015 would raise the federal minimum wage by 66 percent to $12 an hour. The legislation received a high-profile backer this fall in Democratic presidential candidate Hillary Clinton.

Proponents say that such a boost will reduce poverty without reducing jobs. But the academic evidence suggests otherwise. Economists from American and Cornell University studied the 28 states that raised their minimum wages between 2003 and 2007 and found no associated reduction in poverty. And, last year, the nonpartisan Congressional Budget Office (CBO) drew on the best available minimum wage research to analyze the impact of a $10.10 federal minimum wage and concluded that 500,000 employees would lose their jobs if the legislation came into effect.

In this new analysis, Drs. William E. Even and David Macpherson, economists from Miami University and Trinity University, respectively, use the same methodology as the CBO and conclude that 770,000 jobs would be lost if this legislation mandating a $12 minimum wage were enacted.

The analysis also explores the reasons why minimum wage increases have historically had such little success in decreasing poverty. The analysis finds that the average household income of those affected by the $12 legislation is $55,800. That’s largely because, as the analysis reveals, 60 percent of those affected by the hike are secondary or tertiary earners in their household.

Presidential primary candidate Hillary Clinton has argued for a minimum wage increase as part of her policy platform to boost the middle class. But this analysis shows that those with household incomes between $35,000 and up to $100,000 would bear a large portion (43%) of the job loss from this higher minimum wage.

Job Loss

In the table below, the economists use Current Population Survey (CPS) data to identify the number of employees in each state who would be affected by a $12 minimum wage. Using the CBO methodology, they estimate the amount of job loss that would occur if the minimum wage increase were enacted. In total, they conclude that approximately 770,000 jobs would be lost nationwide at a $12 minimum wage.

Number Affected and Employment Loss by State

Other minimum wage proponents, most notably presidential candidate Hillary Clinton, have backed the proposal as part of a policy package to help middle class. However, in the table below, the economists show that those households with incomes between roughly $35,000 and $100,000 would bear a large proportion of the job loss, losing approximately 43 percent of the 770,000 lost jobs.

Employment Loss by Household Income

Using CPS data, the economists also identify which demographics would be hardest hit by this job loss. They find that it would disproportionately impact black Americans, who would suffer 18 percent of the lost jobs despite being 13 percent of the U.S. population.

Employment Loss by Race

Family Income and Family Status

The CPS also allows the economists to identify the income and family characteristics of those who would be affected by the wage hike. Contrary to the claims of minimum wage proponents, who argue that the minimum wage needs to be raised to help those in poverty, the analysis finds that the average family income of those affected by the proposed wage hike is $55,800 – around three times the federal poverty line.

Family Income of Affected Employees

Further examination of the CPS data helps explain this apparent paradox. The economists find that roughly 60 percent of those affected by the proposed minimum wage hike are secondary or tertiary earners in their families. In other words, most minimum wage earners supplement family incomes rather than drive them. In fact, only 9 percent of those affected by the wage hike are single parents.

Family status of those affected by $12

Methodology

Drs. Even and Macphersons’ estimates rely on data from the Current Population Survey from January through December 2014.   The Current Population Survey (CPS),  jointly sponsored by the Bureau of Labor Statistics and the  U.S. Census Bureau, contains data obtained  from monthly interviews with approximately 60,000 households from all 50 states and the District of Columbia.     The data provides weights that allow researchers to estimate labor market statistics at the national or state level.   For example, the CPS is the primary data source for estimates of the national and state unemployment rate, as well as hours worked and hourly wages.

When a household is selected for inclusion in the CPS, it is included for four consecutive months, then excluded for 8 months, and then it returns for an additional 4 months.   Earnings data is collected from household members only in their 4^th and 8^th interview when they are considered part of an “outgoing rotation group” (ORG).   Because earnings data is essential to our analysis of minimum wage effects, they rely on data collected from households who are part of a CPS-ORG between January and December 2014.

To project the distribution of wages in 2020 without passage of the new legislation, they assume that every potentially affected worker has wage growth of 2.9 percent annually until 2020 and that the labor force will grow by 0.86 percent annually.  These assumptions are based on the CBO’s own forecast of wage growth for low skill workers in their study of the employment effects of minimum wage hikes, and their projection of employment growth.   Also, for any state that indexes their minimum wage for inflation, they assume that the minimum wage would grow by 2.1 percent  annually based on the CBO forecast of inflation for 2015 and 2020.    For any worker who earned at or above the minimum in the year of the survey (2014) and whose predicted wage in 2020 was below the projected minimum in their state of residence, they increase their wage to the state’s minimum in 2020.   For workers who earned up to $.25 below the minimum in the year of the survey, they increase by the amount that the state’s minimum wage would increase based on current law.   This means, for example, that a person who earned $.15 less than the minimum wage in 2014 would still earn $.15 below the state’s new minimum in 2020.

Estimating Affected Workers and Employment Loss

After generating the forecast of the 2020 distribution of wages reflecting wage growth and the effects of indexing on the minimum wage, they identify workers who would be affected by the new law mandating a $12.00 minimum as those with wages between the predicted state minimum wage legislated for 2020 and the proposed minimum ($12).  They also include those workers who theyre slightly below (up to $.25) the old and new minimum.

To estimate the number of affected workers, they estimate the number of affected workers for 2020 based on the 2014 data.    They estimate the number of affected workers by summing their earnings weights (adjusted for labor force growth through 2020) and dividing the total by 12  (the number of months of data).

To estimate employment loss, for each affected worker they compute:

L = e *(Proposed Min Wage /Min Wage 2020 – 1)

where e is an assumed elasticity of employment with respect to changes in the minimum wage, Min Wage 2020 is the minimum wage currently legislated for 2020 and Proposed Min Wage is the $12.00 minimum that is being proposed for 2020.   To estimate the aggregate employment loss in the economy, they use adjusted earnings weights to sum L across workers. They also follow the Congressional Budget Office (2014) and use an elasticity of 0.15 for non-teenagers and 0.45 for teenagers.