How raising minimum wage to $15/hr might impact the long-term economy

UC Berkeley Labor Center Chair Ken Jacobs joins Yahoo Finance Live to discuss how raising the U.S. minimum wage will help workers recover from their outstanding debts during the pandemic.

Video Transcript

AKIKO FUJITA: Let's bring in Ken Jacobs. He is UC Berkeley Labor Center Chair. We've also got Yahoo Finance's Aarthi Swaminathan joining in on the conversation.

It's great to talk to you, Ken. Let's start by walking through some of those numbers that Jess just pointed to out from the CBO. Because you have said, in the long run, you think that raising the federal minimum wage would actually reduce the government's bottom line when you consider how many Americans that would benefit from that are actually on some of these safety net programs. Do the numbers out today change your view at all?

KEN JACOBS: First, I'll have to say, the numbers just came out, so I haven't had a chance to fully digest them. But from what I've looked at so far, they do not. There are some other studies that came out at the end of last week-- one by one of my colleagues at UC Berkeley, another by the Economic Policy Institute-- that estimated large savings to the federal government from an increase in minimum wage. And that's because we found that 47%-- close to half of the families who would receive a pay increase under the Raise the Wage Act-- are enrolled in one or more of the public assistance programs, and that comes at a cost of $107 billion a year to the taxpayers. That's mostly federal, some state.

And when you look at what will happen if you raise the minimum wage, you increase families' incomes. That reduces reliance on public assistance programs. You also delay retirements. People stay in the labor market longer. That increases-- and you increase earnings, so we've got more taxes being collected because people are earning more, as well as less Social Security outlays going out because of that delayed retirement. So I think there are a lot of very strong positive factors on the budget from raising the minimum wage.

And then, finally, we know from the research that, in the long run, when we improve families' incomes and raise the minimum wage and reduce the number of people in poverty, that has big long-term effects on children's health, children's educational outcomes, adults' mental health, crime, and a host of other downstream effects. So I think the CBO is missing an important part of the picture.

AARTHI SWAMINATHAN: Ken, it's really interesting because some politicians have said the reach to $15 is a lot higher than, for instance, in New York City or in many, many cities in California that have already exceeded-- especially in California-- that $15 target. But how would you-- how would you respond to this? I know there has been research in terms of factoring in how much the labor costs are going to be, so how would you respond to these people?

KEN JACOBS: Well, first, it's important to remember that $15 an hour-- it would reach $15 an hour in 2025. And that's about $13.50 in today's dollars. And there's been a lot of really good research over the last decade and really the last five years looking at the effects of raising the minimum wage. And what that research has found is that increases of the minimum wage in the United States-- and a lot of research out of Europe as well-- have not had a negative effect on employment-- and we can go into-- there's a number of reasons for that-- and have had a real positive effect on improving low-wage workers'/families' income.

And some of the studies looked particularly at this question of-- because when a federal minimum wage goes up, there are parts of the country where it's going up more or that it has a bigger effect because they were starting at a lower place. And even looking in those places where the increases were the greatest, we haven't seen those negative effects on employment, but we have seen real positive effects on workers' income and on family income.

ZACK GUZMAN: Ken, let's focus in on the negative side of this too, if you want to look at it that way. And, obviously, you can disagree considering where interest rates are. But that $54 billion deficit that this would add, when it comes to the idea of getting this passed in the time we find ourselves in, it's interesting because a lot of people pointing out that, generally, when we see minimum wage boosts, it comes in the late-cycle expansion, not when we're in a pandemic and a lot of businesses are worried about kind of keeping their doors open. But when you look at that $54 billion deficit this would create, talk to me about how effective it might be at addressing some of these underlying issues. Because getting close to a million Americans out of the poverty level, above that, I mean, I think it would do well to serve the interests of what we're hearing in the Biden administration, but talk to me about maybe it being an effective use of budget spend.

KEN JACOBS: Well, again, I think that that argument for the $54 billion deficit is based in part on some wrong assumptions about what the overall effects are on employment that's based on some outdated research. And I think the more recent research really points you to some different outcomes. So, first of all, I think we have to start there. But, in the long run, we do see some-- from raising the minimum wage, we would expect some very positive overall effects on families, on their incomes, and on those downstream effects that I mentioned.

And, finally, the minimum wage was first put in place in the United States in 1938 during the Great Depression, and there was a real understanding at the time that an economic downturn is an important time to undergird and set a floor for-- a strong floor for wages to keep families' income and to keep workers' incomes up and to stop a ruinous drive down. And, also, putting more money into people's pockets has a positive impact on the economy and, really, a positive impact on the local economy because that's where low-wage workers spend that money. And so, historically, when we understood from the very beginning of the federal minimum wage in the United States, it was seen as something that you should have during economic downturns as a way to raise people up and get the economy going again. So I think the argument for not doing it in this period is mistaken. But, also, an important point to note, again, this is a slow raise over multiple years. This is not something that would happen all at once.

AARTHI SWAMINATHAN: Right. And I'm glad you mentioned that. So that kind of brings me to my question on, you know, with all of the conversations, do you think a longer phase-in period would make sense? But we also have a note from Goldman Sachs saying, you know, maybe bring it down to $11. There's so much compromise that's being discussed, right, so what would be a good place to end up, or are you just saying, no, we should just swallow the pill-- $15 by 2025?

KEN JACOBS: Well, Congress is going to go through what Congress goes through to come out with something at the end. But I think that $15 in 2025 is a reasonable place to be in the United States. People cannot survive-- we've been stuck at $7.25 for nine years now. It's the longest time we've gone without an increase in the minimum wage since the Fair Labor Standards Act was passed in 1938. Tipped workers can earn as little as $2.13 an hour. We need to increase the minimum wage. It's important to raise that floor. And I think $15.00 in 2025 is a good target to get to.