Analysis: Raising the minimum wage could save billions in public assistance

Raising the federal minimum wage isn’t only good for workers — it’s good for the federal budget as well, according to a new issue brief from the Economic Policy Institute.

Released earlier this month, the policy brief details just how many low-wage workers have to depend on public assistance programs to make ends meet and how increasing the minimum wage could save billions in federal spending — and those billions could be redirected toward creating stronger, more resilient anti-poverty programs. The brief reports that about half of all workers earning less than $10.10 per hour, the new minimum wage proposed in the federal Fair Minimum Wage Act of 2013, receive public assistance either directly or through a family member via programs such as Medicaid, the Earned Income Tax Credit, the Supplemental Nutrition Assistance Program (also know as SNAP and formerly known as food stamps), the Low Income Home Energy Assistance Program, the Supplemental Nutrition Program for Women, Infants and Children (WIC), the Section 8 Housing Choice Voucher program and the Temporary Assistance for Needy Families program. All of that adds up to more than $45 billion in government assistance each year.

“Essentially, low-wage employers are being subsidized by the taxpayer,” said brief author David Cooper in a news release. “Prices are going up, but paychecks are not, and taxpayers are making up the difference. We’ve long known that raising the minimum wage would help millions of workers and give the economy a boost — now we know it’s a winning idea for taxpayers, too.”

If the minimum wage went up to $10.10, which the federal legislation would do over the span of three years, more than 1.7 million Americans would no longer have to rely on public assistance to meet their basic needs. In fact, the policy brief reported that going up to $10.10 an hour would lower government expenditures by $7.6 billion each year — and that’s a conservative estimate. Overall, safety net programs would save 24 cents for every additional dollar in wages paid to workers who benefit from the minimum wage increase. Right now, accounting for inflation, the current federal minimum wage of $7.25 is about 25 percent less than the minimum wage in 1968. Cooper, an economic analyst, writes:

This failure to adequately raise the wage floor has contributed strongly to the stagnation of wage growth at the bottom of the wage distribution. This wage stagnation has, in turn, been the single greatest impediment to making rapid progress in poverty reduction in recent decades. Indeed, all of the decline in poverty reduction in recent decades can be accounted for by safety net and income-support programs. In fact, managers at some of the largest and most profitable corporations in the United States today actively encourage their employees to seek public assistance to supplement meager paychecks. All of this has led many to conclude that American employers are too often dodging their responsibilities as partners in the social contract — the understanding that Americans who work hard should be paid enough to make ends meet. Instead, too many low-wage employers are leaving both taxpayers and, more importantly, low-wage workers themselves to pick up the slack.

The policy brief examines two methods for estimating how a minimum wage change would affect enrollment in public assistance programs. The first is known as a quasi-experimental design or natural experiment and compares a labor market that did increase the minimum wage to a similar labor market that did not. In this case, Cooper cites a study that examined the effects of a minimum wage increase on SNAP enrollment and spending. That study found that a 10 percent increase in the minimum wage reduced SNAP enrollment by between 2.4 and 3.2 percent and reduced SNAP expenditures by 1.9 percent.

The second research method is known as the simulation method, in which researchers estimate how benefit expenditures would change as hourly wages change, with all else remaining the same. Using this method, Cooper compared the receiving of public assistance among low-wage workers to higher-wage workers and estimated how a raise in the federal minimum wage to $10.10 would affect the use of public assistance programs. He found that increasing the minimum wage would provide about $32 billion in additional wages to more than 27 million workers, which “would unquestionably improve living standards for millions of working families.” He also found that a $1 hourly wage increase would be expected to reduce the average annual benefit dollars received from all safety net programs by $126 per affected worker. In total, a minimum wage raise could save the nation $7.6 billion in safety net spending.

Cooper noted in his conclusion that the safety net programs explored in the brief are critical for struggling families and “if anything, these programs are in need of expansion.” However, he also wrote that it’s time to call on employers to do a better job.

“As American businesses achieve record profit levels, we have to question whether it is appropriate to rely more and more heavily on safety net programs as the sole policy tool to raise working individuals’ incomes or whether we should expect more from the businesses that employ them,” Cooper writes.

To download a full copy of the policy brief, “Raising the Federal Minimum Wage to $10.10 Would Save Safety Net Programs Billions and Help Ensure Businesses are Doing Their Fair Share,” visit the Economic Policy Institute.

Kim Krisberg is a freelance public health writer living in Austin, Texas, and has been writing about public health for more than a decade.