This week, House progressives Reps. Delia Ramirez (D-IL) and Analilia Mejia (D-NJ) unveiled a new proposal to raise the federal minimum wage up to $25 an hour. Proponents – including several unions and anti-tip credit organization One Fair Wage – say this hourly rate is intended to address the rising cost of living, but inflation data shows a $25 target is well-beyond the scope of government data on inflation. What’s worse – economists studying minimum wage hikes have found that raising the minimum wage could actually make the cost of living worse for Americans.
A $25 Minimum Wage Has No Economic Precedent
Proponents of steep federal wage hikes like this often say they want to adjust the existing federal minimum wage to account for rising inflation in the last few years.
However, if the minimum wage were increased by the rate of inflation since the last time the federal government raised the rate (in 2009), it would equal roughly $11 now. If increased based on inflation since the federal minimum wage was created in 1938, it would be roughly $5.90 today. That includes rising inflationary pressures in the last several years, stemming from the pandemic and following economic conditions.
That’s why economists typically do not support large increases in the federal minimum wage – up to $15 or even higher. In a survey of American labor economists, EPI found a majority opposed raising the minimum wage up to $15 as was proposed several years ago, and even more raised concerns about higher proposals, such as a since-rejected ballot measure to raise the minimum wage to $18 in California.
This new $25 federal wage proposal represents a near-250% increase in the minimum wage in just a few years. That’s a spike nearly five times greater than the growth of inflation in the last 25 years.
Federal Wage Hikes Could Worsen Inflation for Americans
It isn’t just businesses and workers that could see harmful impacts of a $25 minimum wage. Studies show consumers are also affected because minimum wage hikes actually contribute to increasing prices and rising cost of living.
EPI analysis of decades of economic research on minimum wages and inflation finds a $1 minimum wage hike could trigger up to a 5.5% increase in consumer prices, particularly for food, rent, childcare, and other basic necessities.
It’s not just studies. California recently tried a $20 per hour minimum wage for the fast food restaurant industry – and economists have documented that in its first year, data shows fast food prices rose as much as 14.5%.
These inflationary impacts – combined with job losses and business closures – don’t boost affordability for Americans. The evidence from across the country finds instead, it could make the cost of living even worse.
Small Businesses Will Be Disproportionately Affected
Proponents of recent drastic federal wage bills say they want to levy the increases on large companies with “record-high earnings.” While this ignores the reality of how such massive cost spikes affect even large businesses, it also fails to acknowledge that these proposals will hurt small businesses too.
Recent EPI analysis of federal Census Bureau data shows that the majority of workers earning the federal minimum wage rate of $7.25 an hour are employed at small businesses – such as mom-and-pop retail shops, restaurants, and convenience stores. While more than half (52%) of minimum wage earners are at businesses with less than 100 employees, nearly 2 in 5 minimum wage earners work for companies with fewer than 25 employees.
While businesses of any size will see drastic spikes in labor costs, amid other rising operating costs, under the current $25 proposal – this could be particularly difficult for small businesses to adapt to. Economists warn drastic wage hikes can cause layoffs, price hikes, and business closures across the board, but these negative consequences of a federal minimum wage hike may be even worse for America’s smaller enterprises.
Conclusion
The latest proposal to raise the federal minimum wage to $25 an hour is out of touch with economic reality. Economists have long studied the impacts of minimum wages, and overwhelmingly find they cause lost jobs, higher prices, and shuttered businesses.
Members of Congress should consider the decades of evidence on the consequences of steep wage hikes before moving to more-than-triple the federal minimum wage.