The bare minimum

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The federal minimum wage is currently $7.25 per hour and that number hasn't budged since 2009. Full-time employment at $7.25 per hour produces just $15,080 in income per year. Even for a small family, that is well below the federal poverty line. 

Things could change soon. The Biden administration's $1.9 trillion COVID relief bill includes a provision to increase the federal minimum wage to $15 over five years. After that, the minimum wage would be indexed to inflation. The proposal could benefit tens of millions of Americans. A Brookings study found that 53 million Americans work in low-wage jobs with a median hourly wage of $10.22.

But, even though Democrats control both chambers of Congress, it's not a done deal.

The first issue is related to arcane Congressional procedure. To overcome a filibuster in the Senate, you need 60 votes. And there are only 50 Democrats. The Biden administration realized it would be effectively impossible to get 10 Republican Senators to support the overall package. So it opted to use a process called reconciliation, which cannot be filibustered. 

The catch is that reconciliation can only be used for legislation that is budget-related. Any provision that doesn't have a significant budgetary impact could be ruled as impermissible by the Senate parliamentarian. Biden himself said the minimum wage hike would probably not survive this process.  

But Biden may have it wrong. An analysis of the minimum wage provision by the Congressional Budget Office (CBO) identified several impacts on the budget that would come from increasing the minimum wage to $15.

For example, spending on the "Supplemental Nutrition Assistance Program [SNAP] and child nutrition programs would decline, on net, because increases in income for low-income households would reduce both the number of beneficiaries and their average benefit amount." SNAP spending would decrease by nearly $4 billion over the first five years. This is, incidentally, also a powerful argument for the wage increase in the first place. People with jobs should not be paid so little that they forced to rely on government assistance to feed their families.

The bill would also increase government revenues because it would shift "labor income would increase while capital income would decrease." Labor income is "more heavily taxed" than capital income. That illustrates another injustice with the country's economic system but is a real budgetary impact.   

Ultimately, the Senate parliamentarian will decide whether these budgetary impacts are significant or "merely incidental" to the minimum wage increase. The parliamentarian has ruled that similar moves by Republicans using reconciliation, including reducing the Obamacare mandate penalty to zero, pass this test. So it seems probable, if not assured, that Senate Democrats can overcome these procedural hurdles. The more difficult problem is getting enough Senators to support a $15 minimum wage on the merits. 

The economics of a $15 minimum wage

To pass a $15 minimum wage through reconciliation, Democrats can't afford to lose any votes. Currently, there are two Democratic senators, Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ), who publicly oppose including a $15 minimum wage in the COVID relief package. And several other Democratic senators say they are worried about businesses cutting jobs to compensate for higher labor costs. 

The CBO analysis of the proposal appeared to bolster those concerns. The CBO found if the minimum wage was increased to $15, "employment would be reduced by 1.4 million workers (or 0.9 percent) 2025." The CBO also found that 27 million Americans would see increased wages. But is the CBO right?

Treasury Secretary Janet Yellen said that job loss from a $15 minimum wage would be "very minimal, if anything." Specifically, Yellen cited research into the impact of state and local minimum wages, including increases to $15, that found negligible employment impact as compared to neighboring states that didn't change their wage. 

A University of California at Berkeley study, for example, looked at six cities that raised their minimum wage to $10 or higher. The study specifically examined the impact on "the food services industry, a major employer of low-wage workers." It found that while wages increased, there were no "significant negative employment effects."

Economists believe the minimal impact of minimum wage increases could be due to the increasing monopsony power by employers in the United States labor market. Monopsony power allows employers to control employee wages, enabling them to pay much less than the value of the worker in a competitive market. A classic example is "a mining town—geographically remote so that workers cannot find mining employment elsewhere." The mining company can pay its employees lousy wages and there is little workers can do about it. 

There aren't too many remote mining towns in the United States in 2021 but there is "increasing concentration in a number of sectors of the U.S. economy" which can allow firms to push down wages. Monopsony power may explain why pay for low-wage workers has stalled even as productivity has skyrocketed. Workers produce much more, on average, than they did 50 years ago, but are being paid less in real dollars. 

The politics of a $15 minimum wage

It's unlikely that Manchin or Sinema will change their position based on a discussion of monopsony power. But, as elected officials who face voters every six years, they might be convinced by the politics of increasing the minimum wage. 

A 2019 poll found that 67% of Americans support increasing the minimum wage to $15, including 43% of Republicans. The broad support was reflected in recent state ballot initiatives for a $15 minimum wage. In Florida, for example, Trump prevailed over Biden with 51% of the vote. But a ballot initiative to raise the minimum wage to $15 passed with 61% support. 

Manchin says he supports increasing the minimum wage to $11 per hour because it's "the right place" for "rural America." But according to the MIT living wage calculator, a single person in West Virginia with no children needs to make at least $13.93 per hour to cover basic expenses like food, housing, and transportation. West Virginia's minimum wage is currently $8.75. A study by the Economic Policy Institute found that raising the minimum wage to $15 "would benefit approximately 255,000 West Virginia workers," increasing pay for "35.5 percent of the West Virginia workforce."

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