CBO: Minimum wage boost would increase deficit, cost jobs

Measure would lift an estimated 900,000 Americans out of poverty, study finds

Sen. Bernie Sanders, I-Vt., walks through the Capitol after a vote on Feb. 2, 2021.  (Bill Clark/CQ Roll Call)
Sen. Bernie Sanders, I-Vt., walks through the Capitol after a vote on Feb. 2, 2021. (Bill Clark/CQ Roll Call)
Posted February 8, 2021 at 11:59am, Updated at 2:00pm

A Democratic plan to more than double the federal minimum wage over five years would increase federal deficits by $54 billion over a decade, the Congressional Budget Office said Monday.

Offering an updated and more detailed estimate than its 2019 assessment of similar legislation, the nonpartisan budget agency said the wage boost would lift about 900,000 workers out of poverty but make another 1.4 million workers jobless. And about 27 million workers overall would get a pay boost.

The effort to gradually raise the federal minimum wage from $7.25 an hour to $15 an hour by 2025 is part of President Joe Biden’s pandemic relief package that Congress is beginning to draft this week. Biden said Friday he did not expect the wage measure to survive in the aid package because of a likely procedural challenge in the Senate under the rules of budget reconciliation.

But Senate Budget Chairman Bernie Sanders, I-Vt., said Sunday he was determined to fight to include the wage increase, based on legislation he introduced last month, in the COVID-19 reconciliation package that's taking shape this week. The CBO report gives Sanders new ammunition to make that case.

The Senate’s so-called Byrd rule requires that any items considered under reconciliation must have more than a “merely incidental” impact on federal spending and revenue. While the CBO’s 2019 estimate suggested a minimum wage boost would have only a marginal impact on the federal budget, the new report estimates it would increase deficits by $54 billion.

And the “on-budget” deficit — which excludes components such as the Social Security trust funds and the Postal Service — would increase by nearly $77 billion over a decade. That is the figure that would apply under the reconciliation process Democrats are using to skirt a certain Senate Republican filibuster.

“The CBO has demonstrated that increasing the minimum wage would have a direct and substantial impact on the federal budget,” Sanders said in a statement Monday. “What that means is that we can clearly raise the minimum wage to $15 an hour under the rules of reconciliation.”

But the new deficit estimates — whether $54 billion or $77 billion — present fat targets for Republican critics of the measure to shoot it down. Accommodating the wage boost at that price tag could require lawmakers to make cuts to other relief programs to stay within their overall spending cap of nearly $1.9 trillion.

Blaming the referee

Sanders said he could not understand how the CBO could project large deficits when the agency’s 2019 estimate of similar legislation found the wage boost would increase deficits by less than $1 million over a decade. And he pointed to studies by left-leaning think tanks projecting deficit savings.

The CBO said its new estimate took account of a grimmer economic forecast induced by the COVID-19 pandemic. And along with technical adjustments, the agency said its new analysis offered a more sweeping assessment of behavioral changes in the labor market and the overall economy that a minimum wage boost was likely to trigger.

Spending on Medicaid, for example, would increase by nearly $16 billion over a decade because of both health care price increases and increased enrollment from newly jobless workers.

The increase in jobless workers would also force the cost of unemployment compensation to rise by $30.5 billion. Social Security costs would rise by $15 billion over a decade, mostly because higher wages lead to increased benefits.

On the positive side, spending on food stamps would drop by $10.3 billion because of higher wages and overall federal revenue would increase by $19.7 billion over 10 years, as higher wages lead to increased taxes.

But labor economists decried the report as a misleading and inaccurate projection of what a minimum wage boost would do.

“Normally, we don’t like to yell at the referees,” said William Spriggs, chief economist at the AFL-CIO, in a conference call with reporters. “It’s bad practice. But in this regard … the CBO has stepped outside its bounds.”

Spriggs said the CBO projected increases in inflation and interest rates from a minimum wage boost based on “no clear systemic research” to justify it. “The CBO is kind of, out of whole cloth, making those claims,” he said. 

The CBO said it projected higher prices on the assumption that nominal economic output, or gross domestic product, would remain unchanged, and that interest rates would be “slightly higher than they would be otherwise” over the decade. But it also acknowledged “uncertainty” in its forecast and said, “there is a wide range of possible outcomes on either side of the estimates shown in this report.”

Heidi Shierholz, director of policy for the labor-backed Economic Policy Institute, said the CBO’s estimates of job losses “are highly questionable” and gave too much weight to inferior studies used in its analysis. Those exaggerated claims of job losses, she said, in turn results in higher projected costs for the government.

And even if those costs are accepted, she said, the benefits would be “enormous” in terms of reducing poverty and inequality.