Potential pros and cons of raising Illinois’ minimum wage

Kevin Hoffman
Sep 11, 2014Raising Illinois’ minimum wage has been a contentious and central campaign issue in the governor’s race, but what exactly are the pros and cons of increasing the state’s current minimum wage of $8.25?

Before getting into a Feb. 2014 report by the U.S. Congressional Budget Office (CBO) on the effects of raising the federal minimum wage to $10.10, here’s an overview of where each gubernatorial candidate stands on the topic, so forget those misleading TV ads you might have seen recently.

Quinn wants to raise the state’s minimum wage to $10 per hour without strings attached, whereas Republican Bruce Rauner supports an increase if three business-related reforms are implemented:

1. Tort reform to protect businesses from frivolous lawsuits.
2. Workers compensation reform in order to reduce workers comp rates in Illinois — one of the highest in the nation.
3. Reform the state’s tax code.

Here’s a video of both Rauner and Quinn discussing minimum wage during a Metropolitan Planning Council event on Aug. 28.

CBO’s two minimum wage raise options

While the aforementioned CBO report analyzes the impact of raising the federal minimum wage to $10.10 by 2016, presumably, the effects will be similar if it’s raised at the state level.

The CBO examined two potential options:

• Increasing the federal minimum wage to $10.10 from $7.25 through 2014 and 2015, with the full amount implemented in 2016. This would be adjusted annually for inflation relative to the consumer price index.
• Raising the minimum wage to $9.00 in 2015 and 2016, but wages would not be adjusted for inflation.

Positive effects  for raising minimum wage

• Low-income workers would receive higher pay and increase families’ incomes, helping some families surpass the estimated 2016 federal poverty threshold of $18,700 for a family of three and $24,100 for a family of four.
• The CBO estimates nearly 16.5 million workers would see higher earnings during the second half of 2016, when the $10.10 minimum wage is fully implemented.
• Earnings for low-income workers would increase to an estimated $31 billion, though, all of those earnings would not only go to low-income families, but also those above the federal poverty threshold as many low-income workers are not members of low-income families.
• The CBO projects 19 percent of $31 billion would go to families living below the federal poverty threshold; 29 percent would accrue to families making more than three times the poverty threshold.

(Click to enlarge)

Negative effects for raising the minimum wage

• Raising the minimum wage results in the elimination of some jobs for low-wage workers, which results in a hefty drop to their income; the share of low-wage workers who were previously employed likely falls slightly.
• If $10.10 minimum wage is fully implemented in 2016, the CBO’s central estimate finds total employment would fall by 500,000 workers. However, actual losses either could be larger or smaller; there is a two-thirds chance decline in employment could be slightly less than the central estimate, or lead to a loss of up to 1 million workers.
• Increased wages for some workers would be accompanied by reductions in inflation-adjusted income for people who became jobless, business owners and for consumers coping with higher prices.

Effects on employment

Increasing the minimum wage reduces employment in two ways, according to conventional economic analyses cited in the CBO report:

1. The scale effect:
   • Paying higher wages requires employers to increase the prices of their products and services causing consumers to purchase less. As a result, businesses produce fewer goods, cut services and hire fewer employees. This ends up reducing employment for both low-wage and high-wage workers.
2. The substitution effect:
   • Minimum wage hikes increase the cost of employing low-wage workers compared to other inputs employers use to produce goods and services– i.e., machinery, technology and more skilled and productive higher-wage workers. To cope with rising expenses, businesses will cut the number of low-wage workers and stick to using other, more efficient input methods.
3. A possible, alternative effect:
   • In some cases, “increasing the minimum wage means that businesses have to pay the existing workers more, whether or not a new employee was hired; as a result, it lowers the additional cost of hiring a new employee, leading to increased employment. There is a wide range of views among economists about the merits of the conventional analysis and of this alternative,” the report wrote.

Effects on family income

The effect on family income hinges on how many low-wage workers are in the household, including whether they become unemployed as a result of minimum wage hikes, or if other, non-related changes in family income occur. As the CBO reminds us, lost income from employment termination can be partially supplemented with increases in unemployment benefits, non-labor sources of income, or instances where employed family members working more hours.

But for business owners-including shareholders–family income falls relative to the decrease in companies’ profits. For many families, real income typically drops because of rising prices for food and services and usually diminishes families’ purchasing power.

The CBO report has more on effects raising the minimum wage would have on family income in the long-term vs. short-term:

The effects on total national income of an increase in the minimum wage differ in the long term and in the short term. In the long term, the key determinant of the nation’s output and income is the size and quality of the workforce, the stock of productive capital (such as factories and computers), and the efficiency with which workers and capital are used to produce goods and services (known as total factor productivity). Raising the minimum wage probably reduces employment, in CBO’s assessment. In the long term, that reduction in the workforce lowers the nation’s output and income a little, which means that the income losses of some people are slightly larger than the income gains of others. In the short term, by contrast, the nation’s output and income can deviate from the amounts that would typically arise from a given workforce, capital stock, and productivity in response to changes in the economywide demand for goods and services. Raising the minimum wage increases that demand, in CBO’s assessment, because the families that experience increases in income tend to raise their consumption more than the families that experience decreases in income tend to reduce their consumption. In the short term, that increase in demand raises the nation’s output and income slightly, which means that the income losses of some people are slightly smaller than the income gains of others.

The CBO report acknowledges there is some uncertainty in its estimates based on the methodology used to make calculations. As for increasing the minimum wage in Illinois–highest among our border neighbors and in the top 25 percent of state’s nationwide–the effects on employment and family income won’t be certain until a wage hike is fully implemented.

You can view a complete PDF version of the CBO’s report by clicking on the link below:

Congressional Budget Office Minimum Wage Report, February 2014

NEXT ARTICLE: Don’t buy what the Illinois governor candidates are selling

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