November 30, 2021

The Minimum Wage Would Violate the Norms of Budget Reconciliation and Hurt Workers

The House Education and Labor Committee recently marked up its recommendations for the reconciliation legislation authorized by H.Con.Res. 11. Tucked away in the section-by-section of the committee’s recommendations, in Sec. 2101, is the Raise the Wage Act, which would gradually increase the minimum wage to $15 per hour. Whether or not the provision will be considered extraneous under the Byrd rule remains to be seen, but the provision will have a significant impact on the economy.

The minimum wage has existed at the federal level since the passage of the Fair Labor Standards Act of 1938, the relevant is 29 U.S.C. §206. The Supreme Court upheld the constitutionality of the federal minimum wage in United States v. Darby Lumber Co. (1941) under the Commerce Clause. The statute was most recently amended by the Fair Minimum Wage Act to gradually increase the minimum wage to $7.25 from $5.15. The Fair Minimum Wage Act was included in the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations Act for FY 2007.

Although the specific text for the House Education and Labor Committee’s recommendations isn’t available, the fact sheet for the standalone version of the bill, H.R. 603, reintroduced by Chairman Bobby Scott (D-VA), shows what the gradual increases would look like. The Senate companion, S. 53, has been reintroduced by Budget Committee Chairman Bernie Sanders (I-VT).

Gradual Increases in the Minimum Wage Under the Raise the Wage Act

YearStandard Minimum WageTipped WageYouth Wage
2020$7.25$2.13$4.25
2021$9.50$4.95$6.00
2022$11.00$6.95$7.75
2023$12.50$8.95$9.50
2024$14.00$10.95$11.25
2025$15.00$12.95$13.00
2026Indexed to Median Wage Growth$14.95$14.75
2027Indexed to Median Wage GrowthStandard Minimum WageStandard Minimum Wage
Source: House Education and Labor Committee

As mentioned, it may be difficult for Democrats to pull off the inclusion of the Raise the Wage Act in reconciliation legislation because of the Byrd rule. The parameters of the Byrd rule are found in 2 U.S.C. §644(b)(1)(A), and one of those parameters states that “a provision shall be considered extraneous if it produces changes in outlays or revenues which are merely incidental to the non-budgetary components of the provision.”

The Raise the Wage Act doesn’t make direct changes to mandatory spending or revenues. Those changes are incidental. The primary purpose is to increase the minimum wage. What happens as a result of increasing the minimum wage is secondary.

On Monday, the CBO released a report on the budgetary and economic impact of the Raise the Wage Act. The report notes that the Raise the Wage Act would increase the budget deficit by $54 billion over ten years, not including another $16 billion in added interest payments on the share of the debt held by the public. The deficit increase is caused by the increase in spending for major healthcare programs, unemployment benefits, and other programs.

Budgetary Impact of the Raise the Wage Act

Program OutlaysFY 2021-FY 2031 (dollars in billions)
Major Healthcare Programs$45,255
Unemployment Compensation$30,515
Social Security$15,159
Nutrition Programs-$10,510
Other-$6,550
Revenues-$19,749
Total Increase in the Deficit$54,120
Source: Congressional Budget Office

The Senate parliamentarian, Elizabeth MacDonough, rules on whether or not provisions pass the Byrd rule. It would take 60 votes to overturn the ruling, and Senate Democrats simply don’t have 60 votes to overrule MacDonough should rule that the Raise the Wage Act violates the Byrd rule. However, she can be overruled by the President of the Senate, Vice President Kamala Harris. Republicans don’t have 60 votes to sustain an appeal of a ruling on a point of order. It would take 51 votes for the Senate to remove an extraneous provision through an amendment or to recommit the legislation back to committee to remove the provision.

Overruling the ruling of the Senate parliamentarian would be a serious departure from the norms of budget reconciliation. A former Senate parliamentarian, Robert Dove, told The Hill that “no vice president, frankly, since Nelson Rockefeller in 1975, has exercised that right.”

The budgetary impact of the Raise the Wage Act is dwarfed by the broader impact on the economy.

Really, the CBO report should be devastating for the Raise the Wage Act, but Democrats are still forging ahead with its inclusion in the reconciliation legislation. Some Democrats are seizing on one particular point from the report, which shows that some 900,000 people will be lifted out of poverty as a result of the Raise the Wage Act. However, that ignores the rest of the report.

In its models, the CBO found that employment would be reduced by an average of 1.4 million workers in 2025. “[H]alf of the 1.4 million people who would be jobless because of the bill,” the report explains, “would have dropped out of the labor force.”

Of course, that figure are subject to uncertainty. The change in unemployment could be lower or greater. As the report explains, “CBO estimates that there is a one-third chance of that effect’s being between about zero and 1.0 million workers and a one-third chance of its being between 1.0 million and 2.7 million workers.”

The CBO also noted that “[y]oung, less educated people would account for a disproportionate share of those reductions in employment.” That shouldn’t surprise anyone.

Another point from the report that shouldn’t surprise anyone is the effect of the Raise the Wage Act on prices. The CBO shows that the health and medical prices would increase. Also, the cost of goods and services would increase.

“Employers would pass some of those increased costs on to consumers in the form of higher prices, and those higher prices, in turn, would lead consumers to purchase fewer goods and services,” the report explains. “Employers would consequently produce fewer goods and services, and as a result, they would tend to reduce their employment of workers at all wage levels.”

Those price increases are going to hit certain industries harder than others. The restaurant industry, for example, will be hit particularly hard. The Education and Labor reconciliation legislation would gradually increase the hourly wage for tipped workers to $15 in 2027 from its current $2.13.

Of course, higher labor costs will cause some employers to look into automation. The CBO points this out, noting, “When the cost of employing low-wage workers goes up, the relative cost of employing higher-wage workers or investing in machines and technology goes down. Some employers would therefore respond to a higher minimum wage by shifting toward those substitutes and reducing their employment of low-wage workers.”

Ultimately, all of this may be a moot point, at least for now. President Joe Biden seems unwilling to violate the basic norms of reconciliation to include the Raise the Wage Act, but nothing is certain until it happens, and so-called “progressives” are pressuring him to go all-in. What’s more, Sen. Joe Manchin (D-WV) isn’t on board with a $15 minimum wage, suggesting instead an $11 minimum wage indexed to inflation.

Jason

Policy wonk. Nonserious musician. Playstation ID: JaseLP22

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