How Increasing the Federal Minimum Wage Could Affect Employment and Family Income (2024)

Federal minimum wage. Options for the target amount for the minimum hourly wage range from $12 to $17 (in $1 increments).

The federal minimum wage would rise by varying amounts in July of each year until it reached the target amount in the year specified for full implementation. Under the default policy based on the Raise the Wage Act of 2023, the minimum hourly wage is $9.50 in 2024, $11.00 in 2025, $12.50 in 2026, $14.00 in 2027, $15.50 in 2028, and $17.00 in 2029; it is indexed to the median hourly wage thereafter.

Subminimum wage for tipped workers. Cash earnings (excluding tips) must be at least $2.13 per hour under current law, and total hourly earnings (including tips) must be greater than or equal to the federal minimum wage.

Users of this interactive tool can leave the subminimum wage unchanged, increase it by varying amounts in July of each year until it reaches 50 percent of the federal minimum wage, or increase it by varying amounts in July of each year until it matches the federal minimum wage. The implementation period for the subminimum wage is one or two years longer than that for the regular minimum wage, depending on whether the minimum wage is adjusted after the target year. For options that increase the subminimum wage, the percentage difference between the federal minimum wage and the subminimum wage is maintained after the implementation period for the subminimum wage ends.

Under the default policy based on the Raise the Wage Act of 2023, the subminimum hourly wage for tipped workers is $6.00 in 2024, $8.00 in 2025, $10.00 in 2026, $12.00 in 2027, $13.50 in 2028, $15.00 in 2029, and $17.00 in 2030; it equals the federal minimum wage thereafter. As with the regular minimum wage, increases in the subminimum hourly wage would occur in July of each year.

Target year for full implementation. Like previous increases in the minimum wage, the options presented here would take years to be fully implemented. The target year for full implementation is the year in which the regular minimum wage reaches its target value.

Under the default policy based on the Raise the Wage Act of 2023, the increase in the regular minimum wage is fully implemented in July 2029. The subminimum wage for tipped workers reaches $17 per hour the following year and equals the regular minimum wage beginning in July 2031.

Adjustments after target year. Users of this interactive tool can leave the minimum wage unchanged after the end of the phase-in period or index it to one of two measures: the consumer price index (CPI, a common measure of the cost of living) or the median hourly wage. Indexing the minimum wage means tying it to another measure so that it is automatically adjusted after it reaches the target amount to grow at the same rate as that other measure. Past increases in the federal minimum wage have not been indexed, so the value of those increases has been eroded by inflation.

Historically, the median hourly wage has grown faster than the CPI, and CBO expects that pattern to continue over the next decade. As a consequence, in this interactive tool, selecting the option to index the minimum wage to the median hourly wage leads to slightly larger effects on employment, wages, and family income than choosing to index it to the CPI.

Directly affected workers. Workers whose wages would be between the previously applicable minimum (state or federal) and the proposed minimum if the federal minimum wage remained unchanged. Under any of the policy options, such workers would either become jobless or see increases in their earnings in an average week.

Potentially affected workers. Workers whose hourly wages would be greater than the proposed minimum but less than that amount plus 50 percent of the difference between the increased federal minimum wage and their previously applicable (state or federal) minimum wage. Only some of those workers’ earnings would increase under any of the policy options.

Income group. Families are grouped on the basis of their projected income (in 2023 dollars) measured in relation to the poverty threshold. In 2029, for example, the average family income of the groups is projected to be as follows: $12,300 for families with income less than the poverty threshold; $33,500 for families with income 1.0 to 1.49 times the poverty threshold; $47,400 for families with income 1.5 to 1.99 times the poverty threshold; $66,000 for families with income 2.0 to 2.99 times the poverty threshold; $113,900 for families with income 3.0 to 5.99 times the poverty threshold; and $285,900 for families with income 6.0 or more times the poverty threshold. Those projections reflect the assumption that the current federal minimum wage remains unchanged.

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

Real family income. This measure constitutes before-tax family cash income (primarily earnings but also unemployment compensation, cash benefits from public assistance programs, and other forms of income) expressed in 2023 dollars to remove the effects of inflation. Changes in real family income reflect increases in earnings for workers who receive a higher wage, decreases in earnings for workers who lose their job, losses in income for business owners, and decreases in purchasing power because of increases in prices.

Subminimum wages for teenagers and disabled workers. For teenage workers, the minimum wage is currently $4.25 per hour during their first 90 days of employment; for disabled workers whose employers are certified by the Department of Labor, minimum wages are based on analyses of prevailing wages and worker productivity.

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 employed under a lower minimum wage. However, for certain workers or in some circ*mstances, 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 (because, for example, they believe no jobs are available for them) as well as unemployed workers (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 change in the minimum wage affected more workers, if it led to larger mandated increases for directly affected workers, if firms had more time to respond (if, for example, the change was phased in over a longer period), and if the minimum wage was indexed to inflation or wage growth.

For details of 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. CBO updated the method it uses to calculate the responsiveness of employment to changes in the minimum wage, which is represented by elasticities. For details about that change, see CBO’s December 2023 report The Budgetary and Economic Effects of S. 2488, the Raise the Wage Act of 2023.

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 short spells of joblessness 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.

EFFECTS ON INCOME

How would increasing the minimum wage affect family income? By boosting the income of low-wage workers who have jobs, a higher minimum wage would raise their families’ real income (that is, income adjusted to remove the effects of inflation), lifting some of those families out of poverty. For other families, however, income would fall because some 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, in this interactive tool, a minimum-wage increase generally causes a net reduction in average family income.

How did CBO estimate the effects on family income? CBO projected the distribution of family income in future years and then combined those forecasts with estimates of the effects on wage rates, employment, business income, and prices. The estimated effects on wage rates also include increases in the wages of some workers who would have earned slightly more than the proposed minimum wage if the minimum wage had not changed, because the literature indicates that wage increases from the policy would spill over to those workers. 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 various channels, such as a reduction in employee 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 thus 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 the effects on the number of people in poverty? CBO projected the distribution of poverty in future years by using the same methods it used to project the distribution of family income and by applying the same definitions of income and poverty thresholds that the Census Bureau uses to determine the official poverty rate.

UNCERTAINTY AND OTHER EFFECTS

How certain are these outcomes? The size of any option’s effects on employment and family income are very uncertain for two main reasons.

First, future wage growth under current law is uncertain. If wages grew faster than CBO projects, then wages in future years would be higher than CBO anticipates. In that case, increases in the federal minimum wage would have smaller effects. If, instead, wages grew more slowly than CBO projects, the effects would be larger.

Second, the responsiveness of employment to an increase in the minimum wage is uncertain. If employment was more responsive than CBO expects, then increases in the minimum wage would lead to larger declines in employment. By contrast, if employment was 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 such changes have little or no effect, but many others have found that increases in minimum wages lead to substantial reductions in employment.

Would changing the minimum wage have other effects? Studies have examined the link between the minimum wage and a range of other outcomes, 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, including 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 for more information is available in Appendix B of The Effects on Employment and Family Income of Increasing the Federal Minimum Wage.

In The Budgetary and Economic Effects of S. 2488, the Raise the Wage Act of 2023, CBO estimated how an option for increasing the minimum wage to $17 would affect the federal budget.

CHANGES SINCE CBO LAST UPDATED THE INTERACTIVE TOOL

How have updates changed the estimates generated by this tool? For two main reasons, outcomes generated by the current version of the tool differ from those produced by the 2022 version.

First, the options would begin to be implemented in July 2024, not January 2023, and the increases in the regular minimum wage would be fully implemented on July 1 of 2028, 2029, or 2030—two and a half years later than the date by which the analogous options in the previous version of the interactive tool would be fully implemented. Wages would grow over those additional years—from 2027 to 2029, for example—further reducing the effect of any given increase in the minimum wage. The default policy based on the Raise the Wage Act of 2023 would begin to be implemented in July 2024 and would be fully implemented in July 2029. (The increase in the subminimum wage for tipped workers would take longer to be fully implemented. It would reach the target for the regular minimum wage of $17 per hour in July 2030, and the two rates would be equal starting in July 2031).

Second, CBO now projects a higher rate of wage growth under current law, so any given increase in the minimum wage would generally have a smaller effect on wages—and thus on employment and family income—than it would have had in the previous version of the interactive tool.

CBO made other revisions to the tool to reflect baseline policy changes (including updating the data it uses to account for increases in states’ minimum wages and the minimum wage for federal contractors), newer data, and an updated method for calculating elasticities. For details about the change CBO made to its method for calculating elasticities, see the agency’s December 2023 report The Budgetary and Economic Effects of S. 2488, the Raise the Wage Act of 2023. Combined, the effects of those changes are smaller than the effects resulting from the later implementation of the policies and the higher projected rate of wage growth.

The computer code for employment elasticities linked below reflects the method that CBO used to calculate elasticities in its analysis of minimum wage policies starting with the 2019 report The Effects on Employment and Family Income of Increasing the Federal Minimum Wage. As noted above, the agency updated its method for calculating employment elasticities for its December 2023 report The Budgetary and Economic Effects of S. 2488, the Raise the Wage Act of 2023. This code does not reflect those changes.