25th Percentile of 

Workers’ Wages

10th Percentile of 

Workers’ Wages

Federal Minimum Wage

$10.10

Option

$9.00

Option

Current

Law

4

6

8

10

12

0

1973 1978 1983 1988 1993 1998 2003 2008 2013

2013 Dollars per Hour

Actual Projected

CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

CBO

The Effects of a 

Minimum-Wage 

Increase on 

Employment and 

Family Income

FEBRUARY 2014
CBO

Notes

Estimates of the effect on employment of the options to increase the minimum wage are 

rounded to the nearest 100,000 workers. 

Numbers in the text, tables, and figures may not add up to totals because of rounding.

Pub. No. 4856
Contents

CBO

Summary 1

What Options for Increasing the Minimum Wage Did CBO Examine? 1

What Effects Would Those Options Have? 1

The Current Federal Minimum Wage 4

Two Options for Increasing the Federal Minimum Wage 4

A $10.10 Option 5

A $9.00 Option 6

How Increases in the Minimum Wage Affect Employment and Family Income 6

Employment 6

Family Income 8

CBO’s Findings About Employment and Family Income 8

Effects of the Options on Employment 9

Effects of the Options on Family Income 11

The Effect of an Increase in the Minimum Wage on the Federal Budget 13

BOX: THE MINIMUM WAGE AND THE EARNED INCOME TAX CREDIT 15

Effects for People Whose Income Would Rise 16

Effects for People Whose Income Would Fall 17

Appendix A: The Basis of CBO’s Findings 19

Appendix B: Research About the Effects of Minimum-Wage Increases 33

List of Tables and Figures 38

About This Document 39

CBO

The Effects of a Minimum-Wage

Increase on Employment and

Family Income

Summary

Increasing the minimum wage would have two principal 

effects on low-wage workers. Most of them would receive 

higher pay that would increase their family’s income, and 

some of those families would see their income rise above 

the federal poverty threshold. But some jobs for low-wage 

workers would probably be eliminated, the income of 

most workers who became jobless would fall substantially, 

and the share of low-wage workers who were employed 

would probably fall slightly.

What Options for Increasing the Minimum Wage 

Did CBO Examine? 

For this report, the Congressional Budget Office (CBO) 

examined the effects on employment and family income 

of two options for increasing the federal minimum wage: 

 A “$10.10 option” would increase the federal 

minimum wage from its current rate of $7.25 per 

hour to $10.10 per hour in three steps—in 2014, 

2015, and 2016. After reaching $10.10 in 2016, the 

minimum wage would be adjusted annually for 

inflation as measured by the consumer price index.

 A “$9.00 option” would raise the federal minimum 

wage from $7.25 per hour to $9.00 per hour in two 

steps—in 2015 and 2016. After reaching $9.00 in 

2016, the minimum wage would not be subsequently 

adjusted for inflation.

What Effects Would Those Options Have?

The $10.10 option would have substantially larger effects 

on employment and income than the $9.00 option 

would—because more workers would see their wages rise; 

the change in their wages would be greater; and, CBO 

expects, employment would be more responsive to a 

minimum-wage increase that was larger and was subsequently adjusted for inflation. The net effect of either 

option on the federal budget would probably be small.

Effects of the $10.10 Option on Employment and 

Income. Once fully implemented in the second half of 

2016, the $10.10 option would reduce total employment 

by about 500,000 workers, or 0.3 percent, CBO projects. 

As with any such estimates, however, the actual losses 

could be smaller or larger; in CBO’s assessment, there is 

about a two-thirds chance that the effect would be in the 

range between a very slight reduction in employment and 

a reduction in employment of 1.0 million workers (see 

Table 1).

Many more low-wage workers would see an increase in 

their earnings. Of those workers who will earn up to 

$10.10 under current law, most—about 16.5 million, 

according to CBO’s estimates—would have higher earnings during an average week in the second half of 2016 if 

the $10.10 option was implemented.1

 Some of the people 

earning slightly more than $10.10 would also have higher 

earnings under that option, for reasons discussed below. 

Further, a few higher-wage workers would owe their jobs 

and increased earnings to the heightened demand for 

goods and services that would result from the minimumwage increase. 

1. In addition to the people who became jobless, some workers 

earning less than $10.10 per hour and not covered by minimumwage laws would also not have increased earnings.
2 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME FEBRUARY 2014

CBO

Table 1.

Estimated Effects on Employment, Income, and Poverty of an Increase in the 

Federal Minimum Wage, Second Half of 2016

Source: Congressional Budget Office based on monthly and annual data from the Census Bureau’s Current Population Survey.

a. The minimum wage would rise (in three steps, starting in 2014) to $10.10 by July 1, 2016, and then be indexed to inflation.

b. The minimum wage would rise (in two steps, starting in 2015) to $9.00 by July 1, 2016, and would not be subsequently indexed to 

inflation.

c. Uses values at or near the midpoints of estimated ranges for key inputs.

d. In CBO’s assessment, there is a two-thirds chance that the actual effect would be within this range.

e. Some of the people with hourly wages slightly above the proposed minimum wage would also have increased earnings under the options.

f. Changes in real (inflation-adjusted) income include increases in earnings for workers who would receive a higher wage, decreases in 

earnings for workers who would be jobless because of the minimum-wage increase, losses in income for business owners, decreases in 

income because of increases in prices, and increases in income generated by higher demand for goods and services.

g. Calculated using before-tax family cash income. Poverty thresholds vary with family size and composition. The definitions of income and 

of poverty thresholds are those used to determine the official poverty rate and are as defined by the Census Bureau. CBO projects that in 

2016, the poverty threshold (in 2013 dollars) will be about $18,700 for a family of three and $24,100 for a family of four. 

The increased earnings for low-wage workers resulting 

from the higher minimum wage would total $31 billion, 

by CBO’s estimate.2

 However, those earnings would not 

go only to low-income families, because many low-wage 

workers are not members of low-income families. Just 

19 percent of the $31 billion would accrue to families 

with earnings below the poverty threshold, whereas 

29 percent would accrue to families earning more than 

three times the poverty threshold, CBO estimates.3

Moreover, the increased earnings for some workers would 

be accompanied by reductions in real (inflation-adjusted) 

income for the people who became jobless because of the 

minimum-wage increase, for business owners, and for 

consumers facing higher prices. CBO examined family 

$10.10 Optiona $9.00 Optionb

Central estimatec -500,000 workers -100,000 workers

Likely ranged Very slight decrease to Very slight increase to

-1.0 million workers -200,000 workers

Number of Workers With Hourly Wages Less Than the Proposed 

Minimum Whose Earnings Would Increase in an Average Weeke 16.5 million 7.6 million

Families whose income is below the poverty threshold $5 billion $1 billion

$12 billion $3 billion

Families whose income is between three and six times

the poverty threshold $2 billion $1 billion

-$17 billion -$4 billion

Change in the Number of People Below the Poverty Threshold -900,000 -300,000 g

Families whose income is between one and three times 

the poverty threshold

Families whose income is six times 

the poverty threshold or more

Change in Real Income (2013 dollars, annualized)f

Change in Employment

2. All effects on income are reported for the second half of 2016; 

annualized (that is, multiplied by two); and presented in 2013 

dollars.

3. Poverty thresholds vary with family size and composition; CBO 

projects that in 2016, the poverty threshold (in 2013 dollars) will 

be about $18,700 for a family of three and $24,100 for a family of 

four.
FEBRUARY 2014 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME 3

CBO

income overall and for various income groups, reaching 

the following conclusions: 

 Once the increases and decreases in income for all 

workers are taken into account, overall real income 

would rise by $2 billion.

 Real income would increase, on net, by $5 billion 

for families whose income will be below the poverty 

threshold under current law, boosting their average 

family income by about 3 percent and moving about 

900,000 people, on net, above the poverty threshold 

(out of the roughly 45 million people who are 

projected to be below that threshold under 

current law).

 Families whose income would have been between one 

and three times the poverty threshold would receive, 

on net, $12 billion in additional real income. About 

$2 billion, on net, would go to families whose income 

would have been between three and six times the 

poverty threshold.

 Real income would decrease, on net, by $17 billion for 

families whose income would otherwise have been six 

times the poverty threshold or more, lowering their 

average family income by 0.4 percent.

Effects of the $9.00 Option on Employment and Income. 

The $9.00 option would reduce employment by about 

100,000 workers, or by less than 0.1 percent, CBO projects. There is about a two-thirds chance that the effect 

would be in the range between a very slight increase in 

employment and a reduction in employment of 200,000 

workers, in CBO’s assessment. Roughly 7.6 million 

workers who will earn up to $9.00 per hour under current law would have higher earnings during an average 

week in the second half of 2016 if this option was implemented, CBO estimates, and some people earning more 

than $9.00 would have higher earnings as well. 

The increased earnings for low-wage workers resulting 

from the higher minimum wage would total $9 billion; 

22 percent of that sum would accrue to families with 

income below the poverty threshold, whereas 33 percent 

would accrue to families earning more than three times 

the poverty threshold, CBO estimates. 

For family income overall and for various income groups, 

CBO estimates the following:

 Once the increases and decreases in income for all 

workers are taken into account, overall real income 

would rise by $1 billion.

 Real income would increase, on net, by about 

$1 billion for families whose income will be below 

the poverty threshold under current law, boosting 

their average family income by about 1 percent and 

moving about 300,000 people, on net, above the 

poverty threshold.

 Families whose income would have been between one 

and three times the poverty threshold would receive, 

on net, $3 billion in additional real income. About 

$1 billion, on net, would go to families whose income 

would have been between three and six times the 

poverty threshold. 

 Real income would decrease, on net, by $4 billion 

for families whose income would otherwise have been 

six times the poverty threshold or more, lowering their 

average family income by about 0.1 percent.

Effects of a Minimum-Wage Increase on the Federal 

Budget. In addition to affecting employment and family 

income, increasing the federal minimum wage would 

affect the federal budget directly by increasing the wages 

that the federal government paid to a small number of 

hourly employees and indirectly by boosting the prices of 

some goods and services purchased by the government. 

Most of those costs would need to be covered by discretionary appropriations, which are capped through 2021 

under current law.

Federal spending and taxes would also be indirectly 

affected by the increases in real income for some people 

and the reduction in real income for others. As a group, 

workers with increased earnings would pay more in taxes 

and receive less in federal benefits of certain types than 

they would have otherwise. However, people who became 

jobless because of the minimum-wage increase, business 

owners, and consumers facing higher prices would see a 

reduction in real income and would collectively pay less 

in taxes and receive more in federal benefits than they 

would have otherwise. CBO concludes that the net effect 

on the federal budget of raising the minimum wage 

would probably be a small decrease in budget deficits for 

several years but a small increase in budget deficits thereafter. It is unclear whether the effect for the coming 

decade as a whole would be a small increase or a small 

decrease in budget deficits.
4 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME FEBRUARY 2014

CBO

The Current Federal Minimum Wage

The federal minimum wage was established by the Fair 

Labor Standards Act of 1938 (FLSA) and currently 

applies to about two-thirds of workers in the public and 

private sectors. Workers whose compensation depends 

heavily on tips (such as waiters and bartenders) are subject to a special arrangement: The regular minimum wage 

applies to their compensation including tips, and a lower 

cash minimum wage applies to their compensation 

excluding tips. The FLSA also has exceptions for workers 

and employers of certain types, including a provision permitting employers to pay teenage workers $4.25 per hour 

during their first 90 days of employment.4

The nominal federal minimum wage has risen over the 

years. The most recent changes, which took effect in 

July 2007, raised the minimum wage in three steps from 

$5.15 per hour (in nominal dollars) to $7.25 in July 

2009, where it stands today.5

 However, the real value of 

the minimum wage has both risen and fallen, as the 

nominal increases have subsequently been eroded by 

inflation (see Figure 1).6

 That erosion was most pronounced between January 1981 and April 1990 and 

between September 1997 and July 2007—each a period 

of nearly 10 years during which the nominal value of the 

minimum wage was unchanged. 

Many states and localities have minimum-wage laws that 

apply, along with federal law, to employers within their 

jurisdiction. In recent years, states and localities have 

been particularly active in boosting their minimum wage; 

as of January 2014, 21 states and the District of Columbia had a minimum wage that was higher than the federal 

one. In 11 of those states, the minimum wage is adjusted 

automatically each year with inflation, and in four more, 

plus the District of Columbia, future increases have 

already been legislated. In California, for example, the 

minimum wage is scheduled to increase from $8.00 to 

$9.00 in July 2014 and to $10.00 in January 2016. Some 

localities also have minimum wages that are higher than 

the applicable state or federal minimum wage; in San 

Francisco, for instance, the minimum wage is $10.74 per 

hour. Another 20 states have minimum wages equal to 

the federal minimum wage (and linked to it, in some 

cases). In some of those states, the state laws apply to 

some workers and employers who are not covered by the 

FLSA. At the moment, about half of all workers in the 

United States live in states where the applicable minimum wage is more than $7.25 per hour. The applicable 

minimum wage in those states ranges from $7.40 to 

$9.32 per hour (see Figure 2). 

Minimum-wage workers are sometimes thought of 

primarily as teenagers from nonpoor families who are 

working part time, but that is not the case now. Of the 

5.5 million workers who earned within 25 cents of the 

minimum wage in 2013, three-quarters were at least 

20 years old and two-fifths worked full time. Their 

median family income was about $30,000, CBO estimates. (Some of the family incomes within that group 

of workers were substantially higher or lower than that 

amount, in part because the number of working adults in 

their families varied.)

Two Options for Increasing the 

Federal Minimum Wage

Lawmakers have proposed various options for increasing 

the federal minimum wage, including several that would 

increase it to $10.10 per hour and subsequently index it

4. For details about the FLSA’s minimum-wage requirements, 

see Fair Labor Standards Act of 1938, as amended, 29 U.S.C. 

§201 et seq. (2012). See also Department of Labor, “Minimum 

Wage and Overtime Pay” (accessed January 8, 2014), 

www.dol.gov/compliance/guide/minwage.htm.

5. After CBO completed its analysis of increasing the federal 

minimum wage, the President issued an executive order, entitled 

“Minimum Wage for Contractors,” that established a minimum 

wage of $10.10 per hour for certain individuals working under 

new contracts with the federal government, beginning on 

January 1, 2015. That order slightly reduces the number of 

workers who would be affected by increasing the federal 

minimum wage and thus slightly reduces the estimated effects 

presented in this report.

6. Adjusted for inflation, the federal minimum wage reached its 

historical peak in 1968. In that year, its value in 1968 dollars was 

$1.60, which is equal to $8.41 in 2013 dollars if the conversion is 

done with the price index for personal consumption expenditures 

published by the Bureau of Economic Analysis. CBO generally 

uses that index when adjusting labor market data for inflation, 

considering it a more accurate measure than a common 

alternative—the consumer price index for all urban consumers 

(CPI-U), which is published by the Bureau of Labor Statistics 

(BLS). According to many analysts, the CPI-U overstates increases 

in the cost of living because it does not fully account for the fact 

that consumers generally adjust their spending patterns as some 

prices change relative to other prices and because of a statistical 

bias related to the limited amount of price data that BLS can 

collect. The value of $1.60 in 1968 dollars is equal to $10.71 in 

2013 dollars if the conversion is done with the CPI-U.
FEBRUARY 2014 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME 5

CBO

Figure 1.

Workers’ Hourly Wages and the Federal Minimum Wage, 1973 to 2018

(2013 dollars per hour)

Source: Congressional Budget Office based on monthly data from the Census Bureau’s Current Population Survey and on data from the 

Department of Labor.

Note: CBO converted wages to 2013 dollars using the price index for personal consumption expenditures published by the Bureau of

Economic Analysis. For example, nominal values in 2016 of $10.10 and $9.00 were adjusted downward to account for projected 

inflation between 2013 and 2016. After 2016, the minimum wage under the $10.10 option would increase slightly in the 2013 dollars 

shown in this figure because it would be indexed to the consumer price index, which would grow faster than the price index for 

personal consumption expenditures, CBO projects. Values for the federal minimum wage—both actual values and projected values 

under the $10.10 option, the $9.00 option, and current law—are as of July 1 of each year. 

a. The hourly wage of workers not paid hourly was estimated as their weekly earnings divided by their usual hours worked per week. Values 

after those for 2013 are projected under current law.

b. The minimum wage would rise (in three steps, starting in 2014) to $10.10 by July 1, 2016, and then be indexed to inflation.

c. The minimum wage would rise (in two steps, starting in 2015) to $9.00 by July 1, 2016, and would not be subsequently indexed to 

inflation.

for inflation.7 CBO has assessed the impact of such an 

option, as well as the impact of a smaller increase that 

would boost the minimum wage to $9.00 per hour 

and would not link future increases to inflation. (See 

Appendix A for information about how CBO conducted 

its assessments.) The options that CBO analyzed would 

not change other provisions of the FLSA, such as the one 

that applies to wages for teenage workers during their first 

90 days of employment.

A $10.10 Option

CBO examined an option that would increase the federal 

minimum wage from $7.25 per hour to $8.20 on July 1, 

2014; to $9.15 one year after that; and to $10.10 after 

another year. The increase in the minimum wage 

between 2014 and 2016 under this option would be 

about 40 percent, roughly the same percentage as the 

total increase from 2007 to 2009 but larger than several 

earlier increases. Each year after that, the minimum wage 

would rise with the consumer price index.8

In addition, this option would raise the minimum cash 

wage for tipped workers from $2.13 per hour to $4.90 

in three steps timed to coincide with the changes in the 

minimum wage. Then, starting in 2017, the minimum 

$10.10

Optionb

25th Percentile of Workers' Wagesa

10th Percentile of Workers' Wagesa

Federal Minimum Wage

Actual Projected

$9.00

Optionc

Current

Law

1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

0

4

6

8

10

12

7. See, for example, S. 460, the Fair Minimum Wage Act of 2013; 

S. 1737, the Minimum Wage Fairness Act; and H.R. 3939, the 

Invest in United States Act of 2014. Another proposal (H.R. 

3746, the Fair Minimum Wage Act of 2013) would increase the 

minimum wage to $11.00 and subsequently index it for inflation.

8. The $10.10 option is based on the provisions of S. 460, the Fair 

Minimum Wage Act of 2013. (The FLSA and S. 460 also apply to 

Puerto Rico and certain other U.S. territories, but because of 

limitations in available data, CBO’s analysis is limited to the 

effects of minimum-wage increases on employment and family 

income in the 50 states and the District of Columbia.)
6 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME FEBRUARY 2014

CBO

Figure 2.

Shares of All Workers, by States’ Applicable 

Minimum Wage, 2014

Source: Congressional Budget Office based on monthly data from 

the Census Bureau’s Current Population Survey and on 

data from the Department of Labor.

Note: As of January 1, 2014, 21 states and the District of Columbia 

had a minimum wage above the federal minimum wage. The 

highest was $9.32 in the state of Washington.

cash wage for tipped workers would rise by 95 cents each 

year until it reached 70 percent of the minimum wage 

(which would occur in 2019, by CBO’s estimate); in 

subsequent years, it would be tied to inflation.

A $9.00 Option

CBO also examined a smaller change that would increase 

the federal minimum wage from $7.25 per hour to $8.10 

on July 1, 2015, and to $9.00 on July 1, 2016. The minimum cash wage for tipped workers would increase when 

the minimum wage increased, and by the same percentage. The increase in the minimum wage would start one 

year later than it would under the $10.10 option. Like 

previous minimum-wage increases, this one would not be 

indexed to subsequent inflation. This $9.00 option is 

more similar than the $10.10 option to minimum-wage 

increases studied in the economics literature in a number 

of respects: the size of the increase, the portion of the 

workforce that it would affect, and the fact that its real 

value would be eroded over time.

How Increases in the Minimum Wage 

Affect Employment and Family Income

In general, increases in the minimum wage probably 

reduce employment for some low-wage workers. At the 

same time, however, they increase family income for 

many more low-wage workers. 

Employment

According to conventional economic analysis, increasing 

the minimum wage reduces employment in two ways. 

First, higher wages increase the cost to employers of producing goods and services. The employers pass some of 

those increased costs on to consumers in the form of 

higher prices, and those higher prices, in turn, lead the 

consumers to purchase fewer of the goods and services. 

The employers consequently produce fewer goods and 

services, so they hire fewer workers. That is known as a 

scale effect, and it reduces employment among both 

low-wage workers and higher-wage workers.

Second, a minimum-wage increase raises the cost of lowwage workers relative to other inputs that employers use 

to produce goods and services, such as machines, technology, and more productive higher-wage workers. Some 

employers respond by reducing their use of low-wage 

workers and shifting toward those other inputs. That is 

known as a substitution effect, and it reduces employment among low-wage workers but increases it among 

higher-wage workers.

However, conventional economic analysis might not 

apply in certain circumstances. For example, when a firm 

is hiring more workers and needs to boost pay for existing 

workers doing the same work—to match what it needs to 

pay to recruit the new workers—hiring a new worker 

costs the company not only that new worker’s wages but 

also the additional wages paid to retain other workers. 

Under those circumstances, which arise more often when 

finding a new job is time-consuming and costly for workers, 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 low-wage workers whose wages are affected by 

increases in the minimum wage include not only those 

workers who would otherwise have earned less than the 

$7.25

(47%)

$7.26 to $7.99

(18%)

$8.00

(11%)

$8.01 to $9.32

(25%)
FEBRUARY 2014 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME 7

CBO

minimum but also, in some cases, workers who would 

have earned slightly more than the minimum. After a 

minimum-wage increase, some employers try to preserve 

differentials in pay that existed before—for example, so 

that supervisors continue to be paid more than the people 

they supervise—by raising the wages of people who 

previously earned a little more than the new minimum. 

Also, some wages determined by collective bargaining 

agreements are tied to the federal minimum wage and 

could therefore increase. As a result, an increase in the 

minimum wage causes some workers who would otherwise have earned slightly more than the new minimum 

wage to become jobless, for the same reasons that lowerwage workers do; at the same time, some firms hire more 

of those workers as substitutes for the workers whose 

wages were required to be increased.

The change in employment of low-wage workers caused 

by a minimum-wage increase differs substantially from 

firm to firm. Employment falls more at firms whose 

customers are very sensitive to price increases, because 

demand for their products or services declines more as 

prices rise, so those firms cut production more than other 

firms do. Employment also falls more at firms that can 

readily substitute other inputs for low-wage workers and 

at firms where low-wage workers constitute a large fraction of input costs. However, when low-wage workers 

have fewer employment alternatives overall, employment 

can fall less at firms that offset some of the increased costs 

with higher productivity from employees’ working harder 

to keep their better-paying jobs and with the lower cost of 

filling vacant positions that results from higher wages’ 

attracting more applicants and reducing turnover. Some 

firms, particularly those that do not employ many lowwage workers but that compete with firms that do, might 

see demand rise for their goods and services as their competitors’ costs rise; such firms would tend to hire more 

low-wage workers as a result.

The change in employment of low-wage workers also 

differs over time. At first, when the minimum wage rises, 

some firms employ fewer low-wage workers, while other 

firms do not; the reduced employment is concentrated in 

businesses and industries where higher prices result in 

larger reductions in demand. Over a longer time frame, 

however, more firms replace low-wage workers with 

inputs that are relatively less expensive, such as more 

productive higher-wage workers. Thus, the percentage 

reduction in employment of low-wage workers is generally greater in the long term than in the short term, in 

CBO’s assessment. (However, the total reduction in 

employment might be smaller in the long term; that total 

depends not only on the percentage reduction in employment of low-wage workers but also on the number of 

such workers, which could decline over time if wage 

growth for low-wage workers exceeded any increase in the 

minimum wage, all else being equal.)

Employers might respond to an increase in the minimum 

wage in ways other than boosting prices or substituting 

other inputs for low-wage workers. For example, they 

might partly offset a minimum-wage increase by reducing 

other costs, including workers’ fringe benefits (such as 

health insurance or pensions) and job perks (such as free 

meals). As a result, a higher minimum wage might 

increase total compensation (which includes benefits and 

perks) less than it increased cash wages alone. That, in 

turn, would give employers a smaller incentive to reduce 

their employment of low-wage workers. However, such 

benefit reductions would probably be modest, in part 

because low-wage workers generally receive few benefits 

related to pensions or health insurance. In addition, tax 

rules specify that employers who reduce low-wage workers’ nonwage benefits can face unfavorable tax treatment 

for higher-wage workers’ nonwage benefits. Employers 

can also partly offset higher wages for low-wage workers 

by reducing either formal training or informal mentoring 

and coaching. The evidence on how much employers 

reduce benefits, training, or other costs is mixed. (For 

examples of such evidence, see Appendix B.)

An increase in the minimum wage also affects the 

employment of low-wage workers in the short term 

through changes in the economywide demand for goods 

and services. A higher minimum wage shifts income from 

higher-wage consumers and business owners to low-wage 

workers. Because those low-wage workers tend to spend a 

larger fraction of their earnings, some firms see increased 

demand for their goods and services, boosting the 

employment of low-wage workers and higher-wage 

workers alike. That effect is larger when the economy is 

weaker, and it is larger in regions of the country where 

the economy is weaker. 

Low-wage workers are not the only ones whose employment can be affected by a minimum-wage increase; the 

employment of higher-wage workers can be affected as 

well, in several ways. Firms that cut back on production 

tend to reduce the number of both higher-wage workers 

and low-wage workers. But once a minimum-wage 
8 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME FEBRUARY 2014

CBO

increase makes higher-wage workers relatively less 

expensive, firms sometimes hire more of them to replace a 

larger number of less productive low-wage workers. 

Another factor affecting higher-wage workers is the 

increase in the economywide demand for goods and 

services. All in all, a higher minimum wage tends to 

increase the employment of higher-wage workers slightly, 

according to CBO’s analysis.

Family Income

For most families with low-wage workers, a higher minimum wage boosts family income, because of the increase 

in earnings that many of those workers (including those 

whose wages were slightly above the new minimum) 

receive. A much smaller number of low-wage workers 

become jobless and therefore experience a decline in 

earnings because of the higher minimum wage. 

For families with low-wage workers, the effect of a higher 

minimum wage depends on how many such workers are 

in a family, whether those workers become jobless (and, if 

so, for how long), and whether there are other changes in 

family income. For instance, the decline in income from 

losing a job can be offset in part by increases in nonlabor 

income, such as unemployment compensation, or by 

increases in the work of other family members. 

For business owners, family income (including income 

for shareholders) falls to the extent that firms’ profits are 

reduced. In addition, real family income for many people 

tends to fall a bit, because the increase in prices of goods 

and services reduces families’ purchasing power. 

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.

CBO’s Findings About Employment and 

Family Income

CBO estimated the effects on employment and family 

income of both the $10.10 option and the $9.00 option 

for raising the federal minimum wage.9

 CBO’s estimates 

are for the second half of 2016 because that would be the 

point at which the minimum wage reached $10.10 under 

the first option and $9.00 under the second. In either 

case, the increase in the minimum wage would have two 

principal effects on low-wage workers: The large majority 

would have higher wages and family income, but a much 

smaller group would be jobless and have much lower 

family income. Once the other changes in income were 

taken into account, families whose income would be 

below six times the poverty threshold under current law 

would see a small increase in income, on net, and families 

whose income would be higher under current law would 

see reductions in income, on net. In addition, in either 

case, higher-wage workers would see a small increase in 

the number of jobs.

Increases in the minimum wage would raise the wages 

not only for many workers who would otherwise have 

earned less than the new minimum but also for some 

workers who would otherwise have earned slightly more 

than the new minimum, as discussed above. CBO’s analysis focused on workers who are projected to earn less 

than $11.50 per hour in 2016 under current law (who, in 

this report, are generally referred to as low-wage workers). 

People with certain characteristics are more likely to be in 

that group and are therefore more likely to be affected by 

increases in the minimum wage like those that CBO 

examined. For example, in 2016, 88 percent of the 

9. For an estimate of the effect on employment of a previous 

proposal to increase the minimum wage, see Congressional 

Budget Office, private-sector mandate statement for S. 277, the 

Fair Minimum Wage Act of 2001 (May 9, 2001), www.cbo.gov/

publication/13043.
FEBRUARY 2014 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME 9

CBO

people earning such wages will be at least 20 years old, 

56 percent will be female, and 91 percent will not have 

attained a bachelor’s degree, CBO estimates (see Table 2). 

Effects of the Options on Employment

According to CBO’s central estimate, implementing the 

$10.10 option would reduce employment by roughly 

500,000 workers in the second half of 2016, relative to 

what would happen under current law.10 That decrease 

would be the net result of two effects: a slightly larger 

decrease in jobs for low-wage workers (because of their 

higher cost) and an increase of a few tens of thousands of 

jobs for other workers (because of greater demand for 

goods and services).11 By CBO’s estimate, about 11⁄2 percent of the 33 million workers who otherwise would have 

earned less than $11.50 per hour would be jobless—

either because they lost a job or because they could not 

find a job—as a result of the increase in the minimum 

wage. 

Those job losses among low-wage workers would be concentrated among people who are projected to earn less 

than $10.10 an hour under current law. Some workers 

who would otherwise have earned between $10.10 and 

$11.50 per hour would also see an increase in their wages, 

which would tend to reduce their employment as well, 

CBO estimates. However, some firms might hire more of 

those workers as substitutes for the lower-paid workers 

whose wages had been increased. Those two factors 

would probably be roughly offsetting, CBO anticipates, 

so the number of such workers who were employed 

would probably not change significantly.

The overall reduction in employment could be smaller 

or larger than CBO’s central estimate. In CBO’s assessment, there is about a two-thirds chance that the effect 

of the $10.10 option would be in the range between a 

very slight decrease in employment and a decrease of 

1.0 million workers; thus, there is a one-third chance 

that the effect would be either above or below that range. 

The most important factors contributing to the width of 

the range are uncertainty about the growth of wages over 

the next three years (which influences the number of 

workers who would be affected by the minimum-wage 

increase, as well as the extent to which the increase would 

raise their wages) and uncertainty about the responsiveness of employment to an increase in wages. For example, 

if wage growth under current law was slower than CBO 

projects, implementing the increase would result in more 

people with increased wages and a greater reduction in 

employment than CBO’s central estimate suggests.

Under the $9.00 option, employment would decline by 

about 100,000 workers in the second half of 2016, relative to what it would be under current law, according to 

CBO’s central estimate. That estimate is much smaller 

than the central estimate for the $10.10 option for three 

reasons: Fewer workers would be affected; the change in 

their wages would be smaller; and four aspects of the 

$9.00 option would make employment in 2016 less 

responsive to a minimum-wage increase, CBO expects.12

The first of those four aspects is that the $9.00 option is 

not indexed to inflation, so some employers would probably refrain from reducing employment, knowing that 

inflation would erode the cost of paying higher wages. 

Second, under the $9.00 option, the second half of 2016 

arrives one year after the initial increase in the minimum 

wage—rather than two years, as under the $10.10 

option—and employers would be less likely to reduce 

employment soon after an increase in the minimum wage 

than they would be over a longer period. Third, because 

the cost of paying higher wages under the $9.00 option is 

smaller than that of the $10.10 option, CBO expects 

that fewer employers would find it desirable to incur the 

adjustment costs of reducing employment (such as installation of new equipment). Fourth, the $9.00 option 

would apply to a smaller share of the workforce. Four 

percent of the labor hours in the economy will be worked

10. A central estimate is one that uses values at or near the midpoints 

of estimated ranges for key inputs.

11. In this report, phrases referring to changes in the number of jobs 

are used interchangeably with phrases referring to changes in 

employment. Technically, however, if a low-wage worker holds 

multiple jobs and loses one of them, that would represent a 

reduction of one job but no change in employment (because the 

worker would remain employed). About 5 percent of low-wage 

workers will hold more than one job under current law, CBO 

projects. Therefore, for any given reduction in employment, the 

reduction in the number of jobs will be slightly larger.

12. Under the $9.00 option, the central estimate of the responsiveness 

of employment to a change in the applicable minimum wage 

is -0.075 for teenagers, for example, which means that the 

employment of teenagers would be reduced by three-quarters of 

one percent after a 10 percent change in the minimum wage. 

The equivalent estimate under the $10.10 option is -0.10. See 

Appendix A for more information.
10 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME FEBRUARY 2014

CBO

Table 2.

Projected Characteristics of Low-Wage Workers, Second Half of 2016

Source: Congressional Budget Office based on monthly and annual data from the Census Bureau’s Current Population Survey.

Note: Low-wage workers are people who are projected, under current law in the second half of 2016, to be paid less than $11.50 per hour.

by people who will earn up to $9.00 per hour under current law and who would either receive a wage increase or 

be jobless if the $9.00 option was implemented, CBO 

estimates. In contrast, about 10 percent of labor hours 

will be worked by people who will earn up to $10.10 per 

hour under current law and who would either receive a 

wage increase or be jobless if the $10.10 option was 

implemented. Thus, the $9.00 option would cause a correspondingly smaller increase in costs, which employers 

would be likely to absorb less through reductions in 

employment and more in other ways.

In CBO’s assessment, there is a two-thirds chance that 

the effect of the $9.00 option would be in the range 

between a very slight increase in the number of jobs and a 

loss of 200,000 jobs.13 If employment increased under 

either option, in CBO’s judgment, it would probably be 

because increased demand for goods and services (resulting from the shift of income from higher-income to 

lower-income people) had boosted economic activity 

and generated more jobs than were lost as a direct result 

of the increase in the cost of hiring low-wage workers.

CBO has not analyzed the effects of either option on the 

number of hours worked by people who would remain 

employed or on the decision to search actively for work 

and join the labor force by people who would not 

Characteristic

Age

 16 to 19 87 12

 20 and older 22 88 ___

 All 24 100

Sex

 Female 28 56

 Male 21 44 ___

All 24 100

Educational Attainment

 Less than high school 58 21

 High school graduate or some college 30 70

 Bachelor’s degree 7 10 ___

All 24 100

Hours Worked per Week

 Fewer than 35 58 47

 35 or more 16 53 ___

All 24 100

Number of Employees in Firm

 Fewer than 50 30 48

 50 or more 19 52 ___

All 24 100

Characteristic Who Will Be Low-Wage With Characteristic

Percentage of All Workers With Percentage of Low-Wage Workers

13. In a recent survey, leading economists were asked whether they 

agreed with the statement that “raising the federal minimum wage 

to $9 per hour would make it noticeably harder for low-skilled 

workers to find employment.” When the results were weighted by 

the respondents’ confidence, 40 percent of the economists agreed 

with the statement, 38 percent disagreed, and 22 percent were 

uncertain. However, the survey did not specify how large a drop 

in employment was meant by “noticeably harder . . . to find 

employment.” See University of Chicago Booth School of 

Business, “Minimum Wage” (published February 26, 2013; 

accessed January 8, 2014), http://tinyurl.com/aa52pfo.
FEBRUARY 2014 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME 11

CBO

otherwise be working. Therefore, the agency has not 

reported the effects of the options on full-time-equivalent 

employment or on the unemployment rate. 

Effects of the Options on Family Income

Among the 33 million low-wage workers earning less 

than $11.50 per hour in the second half of 2016 under 

current law, CBO estimates, real earnings would increase 

by $31 billion as a result of higher wages if the $10.10 

option was implemented. (All amounts of income 

reported for that period are annualized—that is, multiplied by two—and reported in 2013 dollars.) About 

16.5 million workers who will earn less than $10.10 per 

hour under current law would receive higher wages, CBO 

estimates, and some workers who will earn between 

$10.10 and $11.50 per hour under current law would 

receive higher wages as well.14 Most of the additional 

income would accrue to families with fairly low income, 

but a substantial portion would also be received by lowwage workers in higher-income families—29 percent and 

6 percent by families who would otherwise have had 

income greater than three and six times the federal 

poverty threshold, respectively.

That increase in income resulting from higher wages 

would be accompanied by reductions of a similar amount 

in real income from several other sources: decreases in 

earnings for workers who would be jobless because of the 

minimum-wage increase; losses in income for business 

owners; and increases in prices of goods and services, 

which would reduce people’s purchasing power. In addition, a few higher-wage workers would be employed and 

earn more because of increased demand for goods and 

services resulting from the minimum-wage increase. 

Once all those factors are taken into account, CBO estimates that the net changes in real income would be an 

increase of about $5 billion for families whose income 

would have been below the poverty threshold under current law; an increase of $12 billion for families whose 

income would have been between one and three times the 

poverty threshold; an increase of $2 billion for families 

whose income would have been between three and six 

times the poverty threshold; and a decrease of $17 billion 

for families whose income would have been greater than 

that (see Figure 3). (In 2016, six times the poverty threshold will be roughly $120,000 for a family of three and 

$150,000 for a family of four, CBO projects.) According 

to CBO’s estimates, the increase in earnings for the few 

low-wage workers living in that last group of families 

would be more than offset by income reductions, in part 

because the losses in business income and in real income 

from price increases would be concentrated in those families (see Table 3). 

Families whose income will be below the poverty threshold in 2016 under current law will have an average 

income of $10,700, CBO projects (see Table 4 on 

page 14). The agency estimates that the $10.10 option 

would raise their average real income by about $300, or 

2.8 percent. For families whose income would otherwise 

have been between the poverty threshold and 1.5 times 

that amount, average real income would increase by 

about $300, or 1.1 percent. The increase in average 

income would be smaller, both in dollar amounts and as a 

share of family income, for families whose income would 

have been between 1.5 times and six times the poverty 

threshold. And for families whose income would otherwise have been greater than six times the poverty threshold, the total effect of the $10.10 option would be a 

reduction in average real income of about $700, or 

0.4 percent. But the effects of a minimum-wage increase 

on family income would vary even among families with 

similar incomes under current law. For example, many 

families with income less than six times the poverty 

threshold would see their income rise; but income for 

a smaller set of those families would decline, because 

some low-wage workers would lose jobs that they would 

otherwise have.

Under current law, CBO projects, there will be roughly 

45 million people in families whose income is below the 

poverty threshold in 2016. The $10.10 option would 

reduce that number by about 900,000, or 2 percent, 

according to CBO’s estimate. That estimate takes into 

account both families whose income would increase and 

move them out of poverty and families whose income 

would fall and move them into poverty. The estimate uses 

a measure of family income called cash income, which is 

used to determine the official poverty rate. Cash income 

includes earnings and cash transfers from the government, such as Supplemental Security Income benefits. 

It excludes noncash transfers, such as benefits from 

Medicaid and the Supplemental Nutrition Assistance 

Program (SNAP, formerly known as the Food Stamp

program); taxes; and tax credits, such as the earned 

14. CBO did not estimate the number of workers in the latter group 

who would receive higher wages as a result of the increase in the 

minimum wage; instead, it applied an estimated average 

percentage increase in wages to all workers in that group. See 

Appendix A for more information.
12 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME FEBRUARY 2014

CBO

Figure 3.

Estimated Effects on Real Family Income of an Increase in the Federal Minimum Wage, 

Second Half of 2016

(Billions of 2013 dollars, annualized)

Source: Congressional Budget Office based on annual data from the Census Bureau’s Current Population Survey.

Note: Calculated using before-tax family cash income. Poverty thresholds vary with family size and composition. The definitions of income 

and of poverty thresholds are those used to determine the official poverty rate and are as defined by the Census Bureau. CBO projects 

that in 2016, the poverty threshold (in 2013 dollars) will be about $18,700 for a family of three and $24,100 for a family of four. 

a. The minimum wage would rise (in three steps, starting in 2014) to $10.10 by July 1, 2016, and then be indexed to inflation.

b. Changes in real (inflation-adjusted) income include increases in earnings for workers who would receive a higher wage, decreases in 

earnings for workers who would be jobless because of the minimum-wage increase, losses in income for business owners, decreases in 

income because of increases in prices, and increases in income generated by higher demand for goods and services.

c. Increases in earnings for workers who are projected, under current law, to be paid less than $11.50 per hour.

d. The minimum wage would rise (in two steps, starting in 2015) to $9.00 by July 1, 2016, and would not be subsequently indexed to 

inflation.

income tax credit (EITC). (Because the EITC provides 

cash to many lower-income families, it is sometimes compared with the federal minimum wage in discussions 

about how to boost lower-income families’ resources; see 

Box 1 on page 15.)

Implementing the $9.00 option would have a smaller 

effect on family income and on the number of people in 

poverty than implementing the $10.10 option would. 

About 7.6 million workers who will earn less than 

$9.00 per hour under current law would receive higher 

wages, CBO estimates, and so would some workers who 

will earn more than $9.00 per hour under current law. 

Once all factors are taken into account, CBO estimates 

that the net changes in total real income would be an 

increase of about $1 billion for families whose income 

Less Than 1.0 1.0 to 1.49 1.5 to 1.99 2.0 to 2.99 3.0 to 5.99 6.0 or More

-20

-15

-10

-5

0

5

10

Ratio of Family Income to the Poverty Threshold

$10.10 Optiona

$9.00 Optiond

Less Than 1.0 1.0 to 1.49 1.5 to 1.99 2.0 to 2.99 3.0 to 5.99 6.0 or More

-20

-15

-10

-5

0

5

10

Ratio of Family Income to the Poverty Threshold

Change in Income From Increases in

Earnings for Low-Wage Workersc

Overall Change in Real Incomeb

Change in Income From Increases in

Earnings for Low-Wage Workersc

Overall Change in Real Incomeb
FEBRUARY 2014 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME 13

CBO

Table 3.

Projected Shares of Workers, by Family 

Income Group, Second Half of 2016

Source: Congressional Budget Office based on annual data from 

the Census Bureau’s Current Population Survey.

Note: Calculated using before-tax family cash income. Poverty 

thresholds vary with family size and composition. The 

definitions of income and of poverty thresholds are those 

used to determine the official poverty rate and are as 

defined by the Census Bureau. CBO projects that in 2016, 

the poverty threshold (in 2013 dollars) will be about $18,700 

for a family of three and $24,100 for a family of four. 

a. Low-wage workers are people who are projected, under current 

law in the second half of 2016, to be paid less than $11.50 per 

hour.

would otherwise have been below the poverty threshold; 

increases totaling $4 billion for families whose income 

would have been between one and six times the poverty 

threshold; and a decrease of about $4 billion for families 

with higher income, as the declines in income for business owners and the loss of purchasing power would more 

than offset the increases in earnings for low-wage workers 

in that group. The agency estimates that average real family income would increase by about $100, or 0.9 percent, 

for families whose income would have been below the 

poverty threshold, and that the number of people living 

in such families would decline by about 300,000, or twothirds of one percent. That is one-third of the decline in 

the number of people in poverty that would occur under 

the $10.10 option, CBO projects. For families whose 

income would otherwise have been six times the poverty 

threshold or more, average real family income would be 

lower by 0.1 percent.

The effects of the two options on average family income 

and on the number of people living in poverty are 

difficult to project accurately. Those effects depend on 

many things, including the extent to which the higher 

minimum wage would reduce employment, the length of 

time that people are not working, and the rate at which 

wages will grow over time under current law. The larger 

the reduction in employment for a given increase in the 

minimum wage, the less effective the policy would be at 

raising families out of poverty. And if wages grew more 

quickly under current law than CBO projects, fewer 

workers would have their wages increased under the 

options, and the effect on poverty would be smaller. (If 

those wages grew less quickly than CBO projects, the 

effect would be larger.)

The Effect of an Increase in the 

Minimum Wage on the Federal Budget

An increase in the federal minimum wage would directly 

affect the federal budget by requiring the government to 

increase wages for a small number of hourly federal 

employees. A minimum-wage increase would also indirectly affect the budget by boosting the prices of some 

goods and services purchased by the government. Most of 

those added costs for wages, goods, and services would 

need to be covered by discretionary appropriations, 

which are capped through 2021 under current law. If the 

caps were not adjusted, federal budget deficits would not 

be affected by the higher costs, but the benefits and government services that could be provided under the existing caps would be reduced. If, instead, lawmakers 

adjusted the caps to cover the higher costs, and if future 

appropriations equaled those higher caps, then deficits 

would be larger. 

In addition, an increase in the federal minimum wage 

would indirectly affect the federal budget by changing 

people’s income—raising real income for some workers 

while reducing the real income of people who would be 

jobless because of the minimum-wage increase, of business owners, and of consumers facing higher prices. As a 

group, the workers receiving an earnings increase would 

pay more in taxes and receive less in benefits than they 

would have otherwise, reducing the federal budget deficit; however, the workers, business owners, and consumers with reduced income would pay less in taxes and 

receive more in benefits, increasing the deficit. 

Ratio of Family

Income to the

Poverty Threshold

Less Than 1.0 6 20

1.0 to 1.49 6 16

1.5 to 1.99 7 14

2.0 to 2.99 16 18

3.0 to 5.99 39 24

6.0 or More 26 9 ____ ____

Total 100 100

Percentage of

Low-Wage

Workersa

Percentage of 

All Workers
14 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME FEBRUARY 2014

CBO

Table 4.

Estimated Effects on Average Real Family Income of an Increase in the Federal Minimum Wage, 

Second Half of 2016

Source: Congressional Budget Office based on annual data from the Census Bureau’s Current Population Survey.

Notes: Changes in real (inflation-adjusted) income include increases in earnings for workers who would receive a higher wage, decreases in 

earnings for workers who would be jobless because of the minimum-wage increase, losses in income for business owners, decreases

in income because of increases in prices, and increases in income generated by higher demand for goods and services. Results are 

weighted by the number of people in the family; for example, when CBO calculated the averages, a family of three would be 

represented three times.

Calculated using before-tax family cash income. Poverty thresholds vary with family size and composition. The definitions of income 

and of poverty thresholds are those used to determine the official poverty rate and are as defined by the Census Bureau. CBO projects 

that in 2016, the poverty threshold (in 2013 dollars) will be about $18,700 for a family of three and $24,100 for a family of four. 

* = between zero and $50; ** = between zero and 0.05 percent.

a. The minimum wage would rise (in three steps, starting in 2014) to $10.10 by July 1, 2016, and then be indexed to inflation.

b. The minimum wage would rise (in two steps, starting in 2015) to $9.00 by July 1, 2016, and would not be subsequently indexed to 

inflation.

CBO anticipates that the increases in income would be 

larger than the decreases in income for a few years after an 

increase in the minimum wage but would be smaller 

thereafter, as discussed earlier in the report. Further, for 

reasons discussed below, CBO anticipates that the effective marginal tax rate—that is, the combination of 

increased taxes and decreased benefits for each additional 

dollar of income—for the increases in income would 

probably be slightly larger than the effective marginal tax 

rate for the decreases in income. Combining those factors, CBO concludes that the net effect on the federal 

budget of raising the minimum wage would probably be 

a small decrease in budget deficits for several years but a 

small increase in budget deficits thereafter. It is unclear 

whether the effect for the coming decade as a whole 

would be a small increase or a small decrease in budget 

deficits.15

Ratio of Family

Income to the

Poverty Threshold

Less Than 1.0 10,700 300 2.8

1.0 to 1.49 26,300 300 1.1

1.5 to 1.99 36,300 200 0.6

2.0 to 2.99 51,400 200 0.4

3.0 to 5.99 86,600 * **

6.0 or More 182,200 -700 -0.4

Less Than 1.0 10,700 100 0.9

1.0 to 1.49 26,300 100 0.4

1.5 to 1.99 36,300 100 0.3

2.0 to 2.99 51,400 100 0.2

3.0 to 5.99 86,600 * **

6.0 or More 182,200 -200 -0.1

2013 Dollars, Annualized Percent

$10.10 Optiona

(2013 dollars, annualized)

$9.00 Optionb

Average Real Family Income 

Before the Wage Change Change in Average Real Family Income

15. Cost estimates produced by CBO and the staff of the Joint 

Committee on Taxation (JCT) typically reflect the convention 

that macroeconomic variables, such as nominal output and the 

average price level, remain fixed at the values that they are 

projected to reach under current law. That is a long-standing 

convention—one that has been followed in the Congressional 

budget process since it was established in 1974 and by JCT since 

the early 1960s. Therefore, in producing a cost estimate for 

legislation that would increase the minimum wage, CBO and JCT 

would not incorporate some of the effects that such an increase 

would probably have on the economy. CBO was not able to assess 

how that approach might affect the estimated budgetary impact of 

increasing the minimum wage. 
FEBRUARY 2014 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME 15

CBO

Box 1.

The Minimum Wage and the Earned Income Tax Credit

The earned income tax credit (EITC) provides cash 

assistance through the federal income tax system to 

low- and moderate-income families on the basis of their 

earnings, adjusted gross income, and family structure.1

At first, as family earnings rise above zero (the “phasein” range), EITC benefits increase; when earnings reach 

a certain point, the benefits stop increasing; when earnings reach a higher point (the beginning of the “phaseout” range), the benefits decline; and when earnings are 

high enough, the benefits end.2

 The maximum credit in 

2014 is $5,460 for people with two qualifying children, 

for example. In 2016, the Congressional Budget Office 

(CBO) projects, the earnings level at which EITC benefits end will range from $15,100 for an unmarried 

worker without children to $54,300 for a married couple with three or more children.

Using the Minimum Wage or the EITC to 

Boost the Resources of Low-Income Families

To achieve any given increase in the resources of 

lower-income families would require a greater shift of 

resources in the economy if done by increasing the minimum wage than if done by increasing the EITC.3

 The 

reason is that a minimum-wage increase would add to 

the resources of most families of low-wage workers 

regardless of those families’ income; for example, onethird of low-wage workers would be in families whose 

income was more than three times the federal poverty 

threshold in 2016, and many of those workers would 

see their earnings rise if the minimum wage rose. By 

contrast, an increase in the EITC would go almost 

entirely to lower-income families.

The Interaction of the

Minimum Wage and the EITC 

An increase in the minimum wage would affect EITC 

benefits in different ways for different families. Many 

families whose income was initially within the phase-in 

range of the EITC schedule would find that increased 

earnings led to additional EITC benefits. But families 

whose income was initially in the phaseout range of the 

schedule would find that income gains from a higher 

minimum wage were partly offset by a reduction in 

EITC benefits. And families whose income was initially 

between the phase-in and phaseout ranges (a range in 

which EITC benefits do not change as earnings rise) 

and remained in that range after the minimum-wage 

increase would see no change in their EITC benefits. As 

for higher-income families with low-wage workers, they 

would not have been eligible for the EITC in the first 

place.

The EITC encourages more people in low-income families to work—particularly unmarried custodial parents, 

often mothers, for whom the EITC is larger than it is 

for people without children.4

 That increase in the number of available workers tends to reduce workers’ wages, 

allowing some of the benefit of the EITC to accrue to 

employers, rather than to the workers themselves.5

 An 

increase in the minimum wage would shift some of 

that benefit from employers to workers by requiring the 

former to pay the latter more.

1. Adjusted gross income is income from all sources not specifically 

excluded from the tax code, minus certain deductions.

2. For a more extensive description of the EITC, see Congressional 

Budget Office, Refundable Tax Credits (January 2013), 

www.cbo.gov/publication/43767.

3. In a 2007 analysis, CBO compared the cost to employers of a 

change in the minimum wage that increased the income of poor 

families by a given amount to the cost to the federal government 

of a change in the EITC that increased the income of poor 

families by roughly the same amount. The cost to employers of 

the change in the minimum wage was much larger than the cost 

to the federal government of the change in the EITC. See 

Congressional Budget Office, Response to a Request by Senator 

Grassley About the Effects of Increasing the Federal Minimum Wage 

Versus Expanding the Earned Income Tax Credit (attachment to a 

letter to the Honorable Charles E. Grassley, January 9, 2007), 

www.cbo.gov/publication/18281. Most of the budgetary effect 

of an increase in the EITC shows up as an increase in spending, 

rather than as a reduction in revenues, because the credit is 

refundable and most of the total benefits represent amounts that 

are paid out rather than amounts that are used to offset other tax 

liabilities.

4. See Bruce D. Meyer and Dan T. Rosenbaum. “Welfare, the 

Earned Income Tax Credit, and the Labor Supply of Single 

Mothers,” Quarterly Journal of Economics, vol. 116, no. 3 

(August 2001), pp. 1063–1114, http://www.jstor.org/stable/

2696426; and Nada Eissa and Jeffrey B. Liebman, “Labor 

Supply Response to the Earned Income Tax Credit,” Quarterly 

Journal of Economics, vol. 111, no. 2 (May 1996), pp. 605–637, 

http://www.jstor.org/stable/2946689.

5. See David Lee and Emmanuel Saez, “Optimal Minimum 

Wage Policy in Competitive Labor Markets,” Journal of Public 

Economics, vol. 96, no. 9 (October 2012), pp. 739–749, 

http://dx.doi.org/10.1016/j.jpubeco.2012.06.001; and Jesse 

Rothstein, “Is the EITC as Good as an NIT? Conditional Cash 

Transfers and Tax Incidence,” American Economic Journal: 

Economic Policy, vol. 2, no. 1 (February 2010), pp. 177–208, 

http://www.jstor.org/stable/25760056.
16 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME FEBRUARY 2014

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Effects for People Whose Income Would Rise

As a group, the workers whose income rose because of a 

minimum-wage increase would consequently pay more in 

taxes and receive less in benefits.16 CBO has previously 

estimated that the effective federal marginal tax rate on 

earnings for low- and moderate-income workers is 

32 percent, on average; that is, the combination of 

increased taxes and decreased benefits equals, on average, 

about one-third of such a worker’s added earnings.17

CBO expects that workers receiving an increase in earnings from a boost to the minimum wage would face a 

similar rate, on average. Therefore, CBO expects that the 

reduction in the deficit associated with people whose 

earnings would rise would be about 32 percent of the 

increase in earnings for those workers.

Part of that deficit reduction would result from increased 

tax payments for the workers who were earning more. 

The largest part of that increase would consist of payroll 

taxes assessed for Social Security and Medicare, which are 

paid at a combined rate of 15.3 percent by most employees and employers.18 The increase in earnings for some 

workers would also increase the amount that they owed 

in income taxes before refundable tax credits were taken 

into account, although almost all of them would owe no 

tax or be in one of the two lowest federal income tax 

brackets. In addition, benefits from the EITC would fall 

for workers whose annual income was in the range where 

the credits decrease with income (see Box 1). (However, 

those benefits would rise for workers whose annual 

income remained in the income range where the credits 

increase with income, and some workers with increased 

earnings would qualify for a larger child tax credit.)

The rest of the deficit reduction would result from less 

federal spending (aside from the effects on refundable 

earned income and child tax credits) for the workers 

receiving an increase in earnings. Spending on cash and 

near-cash transfer programs (such as SNAP and Supplemental Security Income) would decline for those workers, because the amount of those benefits generally falls as 

income rises.19 In addition, spending for premium assistance tax credits and cost-sharing subsidies for health 

insurance purchased through exchanges would decline for 

people who will be receiving such support under current 

law, because the amount of that support also generally 

falls as income rises.20

The estimated effective federal marginal tax rate of 

32 percent does not include the budgetary effects of some 

people’s moving out of Medicaid coverage or into subsidized insurance coverage through exchanges because their 

earnings had increased.21 Some of those effects would 

raise federal costs and others would lower them. In 

particular, some people who will be eligible for Medicaid 

16. In the short term, some people would also see an increase in 

income because, as discussed earlier in the report, an increase in 

the minimum wage would boost economywide demand for goods 

and services and thereby generate an increase in the nation’s total 

output and income. That additional income would raise federal 

taxes and lower benefits. By contrast, in the long term, and also as 

discussed earlier in the report, an increase in the minimum wage 

would generate a decrease in total output and income. That loss in 

income would lower federal taxes and raise benefits; those effects 

are incorporated in the discussion in the following section.

17. Congressional Budget Office, Effective Marginal Tax Rates for 

Low- and Moderate-Income Workers (November 2012), 

www.cbo.gov/publication/43709. Table 6 in that report shows an 

aggregate marginal rate for 2014 of 34.8 percent. Subtracting the 

marginal rate attributable to state income taxes yields a federal 

marginal rate of 32.2 percent. That rate includes the effects of 

federal income and payroll taxes and of refundable earned income, 

child, and premium assistance tax credits for health insurance 

purchased through exchanges. It also includes changes in benefits 

under SNAP and cost-sharing subsidies provided to some 

participants in health insurance exchanges. That report was 

published before the enactment of the American Taxpayer Relief 

Act of 2012, but CBO estimates that the average federal marginal 

rate for 2014 would remain at about 32 percent after 

incorporating the effects of that act.

18. The 12.4 percent Social Security portion of that tax is paid on 

earnings up to a threshold ($117,000 in 2014).

19. Some researchers have examined the change in cash and near-cash 

transfer payments that would result from a minimum-wage 

increase. See Linda Giannarelli, Kye Lippold, and Michael 

Martinez-Schiferl, Reducing Poverty in Wisconsin: Analysis of 

the Community Advocates Public Policy Institute Policy Package

(Urban Institute, June 2012), http://tinyurl.com/q7jb8v6

(PDF, 2.1 MB); and Linda Giannarelli, Joyce Morton, and 

Laura Wheaton, Estimating the Anti-Poverty Effects of Changes in 

Taxes and Benefits with the TRIM3 Microsimulation Model (Urban 

Institute, April 2007), http://tinyurl.com/p75lejh (PDF, 2.9 MB). 

The authors estimate that the reduction in transfer payments for 

those receiving an increase in earnings would be roughly 4 percent 

of that increase in earnings. 

20. A small portion of the premium assistance tax credits represents a 

reduction in revenues. 

21. There would also be budgetary effects of some people’s moving 

between eligibility categories for Medicaid and some people’s 

moving between Medicaid and the Children’s Health Insurance 

Program.
FEBRUARY 2014 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME 17

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under current law and would receive higher earnings 

because of a minimum-wage increase would lose eligibility for Medicaid. Some of those people would gain 

eligibility for subsidized coverage through exchanges and 

would choose to take up that coverage; for those people, 

federal costs would rise. However, some of the people 

who would lose eligibility for Medicaid would not gain 

eligibility for subsidized coverage through exchanges 

(because their income would still be too low) or would 

gain eligibility but would choose not to take up that coverage (in part because they would have to pay a portion of 

their premiums themselves); for those people, federal 

costs would fall. Moreover, some people who, under current law, will not be eligible either for Medicaid or for 

subsidized coverage through exchanges (because they live 

in a state that has not expanded Medicaid coverage under 

the Affordable Care Act but will have too little income to 

qualify for the subsidies) would gain eligibility for subsidized coverage through exchanges and would choose to 

take up that coverage; for those people, federal costs 

would rise. The net federal cost of those various shifts 

would be small, CBO expects.

Effects for People Whose Income Would Fall

Apart from the group of workers whose earnings rose 

because of a minimum-wage increase, other people would 

generally see a reduction in real income, CBO estimates. 

Some of the reduction would consist of lower earnings for 

workers who became jobless for at least part of a year 

because of the change in policy. Some would consist of 

lower profits for business owners. The remainder would 

come from higher prices, which would reduce real 

income. However, it is unclear how much of the total 

reduction in income would come from each of those 

sources, and that allocation would affect the impact of a 

minimum-wage increase on the federal budget. CBO has 

not estimated the effective federal marginal tax rate for 

that collection of reductions in income, but the agency 

anticipates that it would probably be slightly smaller than 

the effective federal marginal tax rate for the people who 

would receive higher income.

CBO estimates that workers who were jobless for at least 

part of a year because of the minimum-wage increase 

would suffer a loss of real income. As a result, those workers would pay less in taxes and receive more in benefits. 

The effective federal marginal tax rate for those workers 

would be similar in magnitude to the rate for workers 

whose earnings rose.

CBO estimates that profits would also be lower. The 

lower profits would mean less in personal and corporate 

income tax receipts. CBO expects that some of the reduction in profits would be for businesses subject to the corporate tax, which would lower corporate tax receipts; the 

reduction in profits would also indirectly reduce personal 

income tax receipts, because stockholders’ dividend 

income and realized capital gains on corporate stock 

would be lower. For those firms, CBO estimates that the 

decline in corporate and personal tax payments would 

amount to roughly one-third of the decline in profits. 

However, some of the reduction in profits would be for 

firms not subject to the corporate tax, most of whose 

income is directly subject to the individual income tax. 

For those firms, the resulting reduction in individual 

income tax payments could be somewhat lower, as a share 

of the reduction in profits, than the estimated one-third 

decline for firms subject to the corporate tax. 

Prices would rise as a result of a minimum-wage increase, 

according to CBO’s analysis. That increase in prices 

would raise federal transfer payments, because some of 

those payments, such as Social Security, are automatically 

indexed to changes in the price level. An increase in prices 

would also reduce federal personal income taxes, because 

many parameters of the tax system change automatically 

when the price level rises. Federal spending that is not 

subject to statutory caps and is not indexed to changes in 

the price level might also increase, although the extent of 

that increase would depend on the concentration of 

minimum-wage workers in the sectors of the economy in 

which the federal government was doing such spending. 

CBO was not able to estimate the effective marginal tax 

rate from the collection of changes in taxes and spending 

that would take place because of price changes.

CBO

Appendix A: 

The Basis of CBO’s Findings

This appendix describes the steps that the Congressional 

Budget Office (CBO) took to arrive at the estimates in 

this report—estimates of the number of low-wage workers affected by the two options for increasing the minimum wage; of the responsiveness of employment to 

changes in the minimum wage; of the options’ total 

effects on employment; and of the options’ effects on 

family income.

How CBO Estimated the 

Number of Workers Who Would Be 

Affected by the Options

CBO estimated the number of workers who would be 

directly affected by the two options for increasing the 

federal minimum wage. Directly affected workers are 

those whose wages would otherwise have been below the 

new federal minimum and who therefore would either 

receive a higher wage or become jobless if the new federal 

minimum was imposed. In 2016, CBO estimates, about 

17.0 million workers would be directly affected by the 

$10.10 option and 7.7 million by the $9.00 option. 

CBO also estimated the number of workers whose wages 

would otherwise have been slightly above (as defined later 

in this section) the new federal minimum in 2016 and 

who would probably also be affected by a change in the 

minimum wage. Under the $10.10 option, there would 

be 8.0 million such workers; under the $9.00 option, 

4.1 million. (The 33 million workers mentioned in the 

text—which refers to all workers who are projected to 

earn less than $11.50 under current law—includes not 

only the 17.0 million directly affected workers under the 

$10.10 option and the 8.0 million workers with wages 

slightly above $10.10 but also some workers, generally 

at the low end of that range, who are not covered by 

minimum-wage laws and some workers, at the high end 

of that range, who live in states projected to have high 

minimum wages in 2016 and who therefore would 

probably not be affected by a change in the federal 

minimum.)

Of the 17.0 million workers directly affected by the 

$10.10 option, 16.5 million would end up with higher 

earnings during an average week in the second half of 

2016, and 500,000 would end up jobless and therefore 

with lower earnings (as estimated using the approach 

described below). Of the 7.7 million workers directly 

affected by the $9.00 option, 7.6 million would end 

up with higher earnings during an average week in the 

second half of 2016, and 100,000 would end up jobless 

and therefore with lower earnings, according to CBO’s 

estimate.

Workers Who Would Be Directly Affected by 

Increases in the Minimum Wage

CBO estimated the number of directly affected workers 

in three main steps: calculating the distribution of hourly 

wages in 2013; projecting the wage distribution in 2016 

under current law; and identifying the workers who 

would be directly affected by a change in the federal 

minimum wage in 2016. 

In the first step, CBO calculated hourly wages for all 

workers in calendar year 2013, using monthly data from 

the Census Bureau’s Current Population Survey (CPS), 

which collects information from about 60,000 households. The CPS is designed to be representative of the 

U.S. civilian population as a whole; each observation in 

the survey represents a number of people, and that number is the observation’s “sample weight.” CBO used those 

sample weights to estimate effects for the entire population on the basis of the people who were surveyed. When 

respondents to the survey did not report an hourly wage, 

their hourly wages were calculated as their usual earnings 
20 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME FEBRUARY 2014

CBO

per week divided by their usual hours worked per week.1

Because calculated wages are subject to error, CBO 

adjusted those wages to be a weighted average of a 

worker’s calculated wage and the average wage of workers 

with similar characteristics—increasing calculated wages 

that were below the group average and decreasing 

wages that were above it.2

In the second step, CBO applied forecasts of employment 

and wage growth to the hourly wages that it had calculated for 2013 to project the distribution of workers’ 

hourly wages in 2016 under current law. CBO expects 

that very high-wage workers will experience faster wage 

growth in the next several years than will workers as a 

whole, so the forecast of wage growth for low-wage workers used in this analysis was smaller than the one in the 

agency’s overall economic forecast. The forecast of wage 

growth also accounted for the penalties, imposed under 

the Affordable Care Act, that some employers will pay for 

not providing qualifying health insurance; those employers will probably pass along the cost of those penalties to 

their workers in the form of reduced wages.3

 In addition, 

CBO accounted for prospective increases in some states’ 

minimum wages, including both changes scheduled in 

current state laws and changes projected on the basis of 

how states have changed their minimum wages in the 

past. That adjustment boosted projected wage growth for 

workers in those states. Altogether, CBO projected that 

nominal wages of low-wage workers—for example, those 

at the 10th percentile of the wage distribution—would 

grow at an average annual rate of 2.9 percent between 

2013 and 2016 under current law.

In the third step, CBO identified workers who would be 

directly affected by a change in the federal minimum 

wage in 2016. That group includes most workers 

projected to have hourly wages lower than the new 

minimum. However, it does not include 2.6 million 

low-wage workers who, CBO projects, would not be 

covered or affected by the Fair Labor Standards Act 

(FLSA).4

 The group of directly affected workers does 

include 3.5 million workers who, though they may not 

be covered by the FLSA, are expected by CBO to be 

affected by an increase in the federal minimum because 

their hourly wages tend to be as concentrated near the 

minimum as are the wages of workers covered by the 

FLSA; those 3.5 million workers consist of employees of 

small firms, workers in occupations generally exempt 

from the FLSA, and teenagers in their first 90 days of 

employment.5

CBO distinguished tipped from nontipped workers 

because a separate minimum cash hourly wage applies to 

workers who receive more than $30 per month in tips. 

Under the FLSA and many state laws, employers may pay 

such workers a lower cash hourly wage if tips bring their 

total hourly earnings above the minimum hourly wage. 

To estimate the number of tipped workers, CBO applied 

the lower minimum cash wage to workers in 11 occupations (such as waiter, bartender, and hairdresser) whose 

compensation depends heavily on tips. They constitute 

about 10 percent of low-wage workers.

Other Workers Who Would Probably Be Affected by 

Increases in the Minimum Wage

CBO also considered the effects of a minimum-wage 

increase on the wages and employment of workers whose 

wages would otherwise have been higher than the new 

1. If the number of hours that the respondents usually worked per 

week varied, CBO used the number of hours that they reported 

having worked during the week prior to the survey. If that number 

was unavailable, CBO used the average hours of full-time or parttime workers, as appropriate. If the Census Bureau imputed an 

hourly wage for the worker, CBO used that wage.

2. That adjustment is based in part on findings from Thomas 

Lemieux, “Increasing Residual Wage Inequality: Composition 

Effects, Noisy Data, or Rising Demand for Skill?” American 

Economic Review, vol. 96, no. 3 (June 2006), pp. 461–498, 

http://dx.doi.org/10.1257/aer.96.3.461.

3. See Congressional Budget Office, The Budget and Economic 

Outlook: 2014 to 2024 (February 2014), Appendix C, 

www.cbo.gov/publication/45010. That forecast of wage growth 

was made in December 2013 and does not account for subsequent 

developments.

4. To project the percentage of low-wage workers who would not 

be covered or affected by the FLSA in 2016, CBO estimated the 

share earning less than the federal minimum wage (or their state’s 

minimum wage, if higher) in 2013, which was 12 percent. 

Because the agency concluded that nontipped workers who 

reported being paid up to 25 cents less, and tipped workers who 

reported being paid up to 13 cents less, than the federal minimum 

wage—or the state minimum, if it was higher—had probably 

misreported their wages, it did not count such workers as being 

paid less than the minimum wage. The analysis does not account 

for localities’ minimum wages because it uses data from the CPS, 

which does not identify the localities in which respondents work.

5. Department of Labor, “Wages and Hours Worked: Minimum 

Wage and Overtime Pay” (accessed January 23, 2014), 

www.dol.gov/compliance/guide/minwage.htm.
APPENDIX A THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME 21

CBO

federal minimum in 2016. Those effects could be positive 

or negative for any particular worker, depending on 

whether that worker’s value to a firm would be higher or 

lower if lower-wage workers became more expensive to 

employ. Available research, however, suggests that the 

average effect on the wages of those workers would be 

positive. (See Appendix B for a list of studies that CBO 

reviewed.) 

In its analysis, CBO assumed that such “ripple effects” 

would probably apply to workers whose projected wage 

in 2016 was up to the amount that would result from 

an increase that was 50 percent larger than the increase 

in their effective minimum wage (incorporating both 

their state minimum and the new federal minimum) 

under either option. Thus, in states where the current 

minimum wage is $7.25, CBO anticipates that workers 

earning up to about $11.50 per hour would probably 

be affected by the $10.10 option. In states with a higher 

minimum wage, the ripple effect would be much smaller. 

For instance, under current California law, the minimum 

wage is scheduled to increase to $10.00 in 2016, and in 

that state, only workers earning up to $10.15 per hour 

would probably be affected by an increase to $10.10 in 

the federal minimum, by CBO’s estimate.

Ripple effects added 8.0 million potentially affected 

workers to CBO’s analysis under the $10.10 option 

and 4.1 million under the $9.00 option. Although CBO 

estimates that wage increases under the options are much 

more likely for those workers than for workers with still 

higher wages, the agency does not expect that all of them 

would receive wage increases. CBO did not have a basis 

for estimating the total number of workers whose earnings would rise, although that number would be less than 

the total number of potentially affected workers. 

Uncertainty in the Estimates

Estimates of the total number of potentially affected 

workers are uncertain for at least four reasons. The first 

and most important is that, if CBO’s forecast of wage 

growth for low-wage workers between 2013 and 2016 is 

either too high or too low, the result will be an underestimate or an overestimate, respectively, of the number 

of workers who would be directly affected by a change in 

the federal minimum wage. Second, determining whether 

workers are covered by the FLSA on the basis of what 

they report to the CPS yields inaccuracies. For instance, 

some respondents undoubtedly misreported their wages, 

earnings, or hours worked, leading CBO to classify some 

unaffected workers as affected and vice versa; similarly, 

the use of occupation to classify people as tipped workers 

results in inaccuracies.6

 Third, changes in states’ minimum wages could be different from what CBO projects. 

Fourth, the ripple effects could be smaller or larger than 

CBO projects.

How CBO Estimated the 

Responsiveness of Employment to 

Increases in Minimum Wages

CBO reviewed a large body of research to estimate how 

adopting either of the two options for increasing the minimum wage would affect employment. Such research 

typically calculates an employment elasticity—that is, 

the percentage change in employment induced by a percentage change in the minimum wage. Researchers 

have generally focused on the employment of workers 

with low average wages, such as teenagers, high school 

dropouts, and workers in low-wage industries. Initially 

focusing on estimates of the employment elasticity for 

teenagers (in part because they were the most commonly 

studied group), CBO arrived at a teen-employment elasticity for each of the options, after accounting for the fact 

that the $10.10 option differed significantly from the scenarios explored by prior research. CBO then synthesized 

the teen elasticities with broader research to construct 

elasticities for adults. (See Appendix B for a bibliography 

of the research that CBO reviewed.)

The elasticities discussed in this section would apply only 

to directly affected workers and not to others whose 

wages would be higher than the new minimum wages 

under the options. For example, CBO concluded that the 

$9.00 option probably would not affect the employment 

of workers who would earn more than $9.00 in 2016 

under current law (except by increasing overall demand 

for goods and services, an effect discussed below). That 

conclusion was the result of considering two opposing 

factors. On the one hand, wages would probably increase 

for some of those workers (such as the supervisors of 

minimum-wage workers), as firms sought to maintain a 

differential between their wages and those of employees 

earning the minimum wage—and that wage increase 

6. For a discussion of mismeasured wage rates, see, for example, John 

Bound, Charles Brown, and Nancy Mathiowetz, “Measurement 

Error in Survey Data,” in James J. Heckman and Edward Leamer, 

eds., Handbook of Econometrics, vol. 5 (Elsevier, 2001), pp. 3705–

3843, http://dx.doi.org/10.1016/S1573-4412(01)05012-7.
22 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME FEBRUARY 2014

CBO

would tend to lower employment. On the other hand, 

some firms would probably employ more workers with 

wages higher than the new minimum, because the productivity of those workers relative to their wages would 

be higher than that of workers whose wages had been 

pushed up by the minimum-wage increase.

Elasticities for Teenagers Under the $9.00 Option

CBO reviewed the economic research to develop a range 

of estimates of the elasticity of teen employment with 

respect to a change in the minimum wage under the 

$9.00 option. On the basis of that review, CBO selected a 

central estimate of that elasticity of -0.075; in other 

words, a 10 percent increase in the minimum wage would 

reduce employment among teenage workers by threequarters of one percent. However, there is considerable 

uncertainty about that elasticity, and CBO developed a 

range of estimates to reflect that uncertainty. The high 

end of the likely range was -0.15 and the low end was 

zero. In CBO’s assessment, there is about a two-thirds 

chance that the effect of the $9.00 option on the employment of teenage workers would lie within that range. 

Some studies, however, have found that increases in the 

minimum wage raise employment slightly, while others 

have found much larger negative effects on employment 

than are reflected in CBO’s range. 

Several factors influenced CBO’s conclusion about the 

range of elasticities for teenagers. First, CBO put more 

weight on studies using certain methodologies than on 

other studies. Several studies compare employment rates 

among states that have different minimum wages but 

otherwise similar labor markets; such analyses plausibly 

isolate the effects of minimum wages from the effects of 

national economic changes, such as fluctuations in the 

business cycle. Other studies try to isolate the employment effects of minimum-wage increases by comparing 

the national employment rate in years when the minimum wage was high to the rate in years when the 

minimum wage was low. CBO put the most weight on 

the studies of state-by-state differences, judging those 

studies to have estimated more accurately the effects of 

minimum wages on employment. Changes in state minimum wages are sometimes related to local economic 

conditions in ways that could lead elasticity estimates 

based on those changes to be higher or lower than the 

elasticity that would apply to similar changes in law in 

the future; CBO considered studies that took a variety of 

approaches to addressing that issue.

Second, CBO considered the role of publication bias in 

its analysis. Academic journals tend to publish studies 

whose reported effects can be distinguished from no 

effect with a sufficient degree of statistical precision. 

According to some analyses of the minimum-wage literature, an unexpectedly large number of studies report a 

negative effect on employment with a degree of precision 

just above conventional thresholds for publication. That 

would suggest that journals’ failure to publish studies 

finding weak effects of minimum-wage changes on 

employment may have led to a published literature 

skewed toward stronger effects. CBO therefore located its 

range of plausible elasticities slightly closer to zero—that 

is, indicating a weaker effect on employment—than it 

would have otherwise.

Third, CBO considered whether economic conditions 

in 2016 could lead the responsiveness of employment to 

an increase in the minimum wage to be larger than it had 

been in the past. One recent study has found evidence 

that the employment elasticity is more negative when 

unemployment is high. However, CBO projects a 

national unemployment rate of about 6 percent for 

2016—a rate similar to the average of unemployment 

rates during the periods studied in the literature from 

which CBO drew elasticity estimates.7

 CBO therefore 

did not adjust its central elasticity estimates to account 

for economic conditions in 2016.

However, the extent to which employment would 

respond to changes in the minimum wage in 2016 in the 

same way that it has in past years is uncertain. For example, the relatively slow growth in the wages of low-wage 

workers observed in the past few decades has been partly 

attributed by many analysts to growth in information and 

other technologies, which have automated some of the 

tasks traditionally done by those workers. Continued 

improvements in such technology will probably lead to 

the automation of some other tasks that they still perform, such as payment collection at retail stores. The pace 

of technological innovation, though, is difficult to predict. Uncertainty about future developments in the labor 

market is reflected in CBO’s range of estimates.

7. See Congressional Budget Office, The Budget and Economic 

Outlook: 2014 to 2024 (February 2014), www.cbo.gov/

publication/45010. For additional information about CBO’s 

projections of future labor market conditions, see Congressional 

Budget Office, The Slow Recovery of the Labor Market (February 

2014), www.cbo.gov/publication/45011.
APPENDIX A THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME 23

CBO

Elasticities for Teenagers Under the $10.10 Option

In analyzing the $10.10 option, CBO used a central 

estimate of the elasticity of employment for teenagers of 

-0.10, with a likely range from a very slight negative 

amount to -0.20. Four main factors differentiate the 

$10.10 option from the $9.00 option and from policies 

studied in previous research, leading CBO to conclude 

that the elasticity would be larger (in absolute value) 

under the $10.10 option.

First, the $10.10 option would index the minimum wage 

to inflation and would therefore result in a higher minimum wage for many years in the future. The federal 

minimum wage has not been previously indexed to 

inflation, and some employers may have refrained from 

reducing employment in response to prior minimumwage increases, realizing that inflation would soon erode 

the cost of those increases. Therefore, an indexed minimum wage would probably reduce employment more 

than a nonindexed minimum wage would—and neither 

the $9.00 option nor most policies studied in past 

research are indexed.

Second, most studies measure changes in employment 

over a short term, typically a year or two. However, 

employment reductions after a minimum-wage increase 

are probably larger over a longer term, in part because 

those reductions may be less attributable to the elimination of existing low-wage jobs than to slower growth in 

the number of low-wage jobs, which is difficult to detect 

in short-term studies. CBO assessed the effects of both 

options in the second half of 2016—two years after the 

first step of the $10.10 option, but only one year after the 

first step of the $9.00 option. That longer lag between 

the initiation of the option and the evaluation date led 

CBO to estimate a larger elasticity for the $10.10 option 

than for the $9.00 option.

Third, raising the minimum wage from $7.25 to $10.10 

represents a 39 percent increase, which would be larger 

than most of the increases that have been studied, and 

CBO expects that employment would be more responsive 

to a larger increase.8

 Many employers incur adjustment 

costs when they reduce staffing (especially if that requires 

restructuring their operations), which may deter them 

from laying off low-wage workers in response to a small 

increase in the minimum wage. But the savings from not 

having those employees are more likely to exceed the 

adjustment costs when the minimum-wage increase is 

large.9

Fourth, the $10.10 option would apply to a larger fraction of the workforce—one that accounts for about 

10 percent of all hours worked, CBO projects—than 

many previous increases did. It would do so not only 

because the percentage increase is large, but also because 

the minimum wage before the increase would be higher 

in real (inflation-adjusted) terms than it was before 

many previous increases (see Figure 1 on page 5).10 For 

example, although the percentage increase in the federal 

minimum wage from 2007 to 2009 was similar to the 

one projected under the $10.10 option, the fraction of 

the workforce affected under that option would be about 

five times as large (see Table A-1).11 When a greater 

proportion of a firm’s work hours are affected by the minimum wage, the adjustment cost per worker of reducing 

staffing (again, especially if the firm is restructuring its 

operations) is probably smaller, making the firm more 

likely to reduce employment.

Translating Elasticities From Previous Research for 

Use in CBO’s Analysis

In order to project the change in employment that 

would result from the $9.00 and $10.10 options, CBO

8. The last increase in the federal minimum wage, implemented 

between 2007 and 2009, constituted a 41 percent increase, but 

earlier percentage increases were typically lower. Some states have 

implemented large percentage increases in the minimum wage, 

however. New York, for example, increased its minimum wage 

from $5.15 to $7.15 per hour—a 39 percent increase—between 

2005 and 2007.

9. In addition, at the same time that the proposed increases in the 

minimum wage would take effect, the Affordable Care Act’s 

requirement that many employers provide health insurance (or 

pay a penalty if they do not) will impose an additional cost on 

employers for some low-wage workers who do not currently have 

employment-based health insurance. CBO expects that the cost 

will ultimately be borne by workers through lower wages; but 

before that adjustment has fully taken effect, the cost further 

boosts the likelihood that employers’ savings from reducing the 

size of their workforces would exceed their adjustment costs.

10. The 10 percent of work hours affected in 2016 by the $10.10 

option is not directly comparable to the percentage of workers 

projected to make less than $10.10 per hour in 2016 as reported 

in Figure 1. That percentage is based on a count of workers, rather 

than of hours worked, and it includes workers making less than 

$10.10 who are not covered by the FLSA.

11. The 10 percent of work hours affected in 2016 by the $10.10 

option reported above differs from the 11.4 percent in 2016 

reported in Table A-1 mainly because of the different definition of 

directly affected workers used in Table A-1 to create a consistent 

series over time.
24 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME FEBRUARY 2014

CBO

Table A-1. 

Comparing Changes in the Federal Minimum Wage Since 1980 With Changes 

Under the Two Options

Source: Congressional Budget Office based on the Census Bureau’s Current Population Survey and on data from the Department of Labor.

Note: For the analysis in this table, to create a consistent series over time, CBO focused on groups of workers earning between the old 

minimum wage and the new minimum wage that was scheduled to take effect within a year. To allow for some misreporting of wages,

workers earning slightly below the old minimum wage were also included. The hours worked were those reported prior to the increase 

in the minimum wage. Those groups of workers differ from the groups of directly affected workers under the options discussed 

elsewhere in this report because they do not account for any wage growth, within the year prior to the new minimum wage’s taking 

effect, that would have occurred if the minimum wage had not been raised, or for increases in state minimum wages that would have 

increased workers’ wages during the period.

a. The amendments to the Fair Labor Standards Act of 1938 mandating the minimum wage increases for these years were enacted in 1977, 

1989, 1996, and 2007.

b. The minimum wage would rise (in three steps, starting in 2014) to $10.10 by July 1, 2016, and then be indexed to inflation.

c. The minimum wage would rise (in two steps, starting in 2015) to $9.00 by July 1, 2016, and would not be subsequently indexed to 

inflation.

converted the elasticity estimates that it drew from the 

literature on teenage workers to elasticity estimates for 

directly affected teenagers and adults.

Elasticities for Directly Affected Teenagers. The research 

discussed above typically defines employment elasticity 

(e) as the responsiveness in the employment ( ) of a 

group of workers, such as teenagers, to a change in the 

applicable minimum wage ( —that is, the 

change in the federal or state minimum, whichever is 

higher), as shown in the following equation: 

The elasticity ranges reported earlier in this appendix are 

based on that approach so that they will be more easily 

comparable to the elasticities typically reported in the 

research literature. In its calculations, however, CBO used 

Year of the Minimum-Wage

Increasea

1980 10.9 8.6

1981 11.7 9.2

1990 4.3 3.2

1991 5.2 4.0

1996 3.4 2.5

1997 5.8 4.3

2007 1.3 0.9

2008 1.9 1.4

2009 2.7 2.0

Average 5.3 4.0

2015 3.9 2.3

2016 7.7 5.7

Average 5.8 4.0

2014 6.3 4.7

2015 10.0 7.7

2016 14.1 11.4

Average 10.1 7.9

Percentage of Workers Earning Percentage of Hours Worked by Workers Earning

Between the Old and New Minimum Wages Between the Old and New Minimum Wages

Changes Since 1980

Projected Changes Under the $9.00 Optionb

Projected Changes Under the $10.10 Optionc

%ΔE

%ΔMW

eliterature

%ΔE

%ΔMW = -------------------
APPENDIX A THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME 25

CBO

elasticities that were modified in two ways to be more 

accurate estimates of the effect of the options.

The first modification that CBO made arose because 

the literature typically focuses on the historical employment response of all teenagers to a change in the 

minimum wage. Many of those teenagers initially had 

low wages and, when the minimum wage rose, received 

a wage increase (or were rendered jobless); but many 

other teenagers had wages that were higher than the new 

minimum and therefore were largely unaffected by the 

change. In contrast, CBO’s approach examines the 

responsiveness of employment of only directly affected 

teenagers to a change in the minimum wage—that is, 

the responsiveness of employment of those who would 

otherwise earn less than the new minimum wage. 

When analyzing the $10.10 option, for example, CBO’s 

approach focuses on the responsiveness of teenage workers who would have earned less than $10.10 per hour in 

2016 if the option had not been implemented. The two 

approaches are similar, but they can yield different results 

when the fraction of teenagers with low wages varies 

over time and with policy changes. In CBO’s view, an 

approach that focuses on the response of low-wage 

workers is more accurate.

The second modification that CBO made was to use 

elasticities that relate employment not to changes in the 

minimum wage itself but to average changes in workers’ 

wages induced by a change in the minimum wage. (For 

instance, a worker who would otherwise have earned 

$9.00 per hour would receive a 12 percent increase if the 

minimum wage rose to $10.10. However, the minimum 

wage for that worker would rise from $7.25 to $10.10, an 

increase of 39 percent.) The elasticities that are typically 

reported in the literature are scaled to the increase in the 

minimum wage itself—but for two reasons, an approach 

relying on them is not as well suited for projecting the 

change in employment resulting from a future change in 

the minimum wage. First, that approach does not incorporate information about the distribution of workers’ 

wages. For example, in a projection of the effect of the 

$10.10 option, it would make no difference, under that 

approach, whether most workers would otherwise have 

earned $7.25 or $10.09. Second, that approach regards 

all directly affected workers as equally likely to lose their 

jobs after a minimum-wage increase, no matter what 

they would otherwise have been paid. In CBO’s view, 

by contrast, workers whose wages are just below the new 

minimum wage are more likely to remain employed after 

it increases than workers who are earning substantially 

less and are probably less valuable to the employer. CBO’s 

approach accounts for the distribution of workers’ wages 

and for the difference in the likelihood of losing one’s job.

CBO calculated the responsiveness of employment 

among directly affected teenagers by dividing the elasticities drawn from the literature by the portion of employed 

teenagers who would earn less than the new minimum 

wage before its implementation ( ) and then 

multiplying by the ratio of the percentage change in 

the applicable minimum wage ( ) to the average 

percentage change in the wages of those teenagers 

( ).12 The following equation shows the 

calculation:

CBO calculated those conversion factors using CPS data 

from 1979 through 2009. The CPS data indicate that 

past increases in the minimum wage typically affected 

about a third of employed teenagers and were typically 

about 50 percent higher than the average of the wage 

changes necessary for compliance with the new minimum. Thus, elasticities for directly affected teenagers 

are about 4.5 times higher, CBO estimates, than the teenemployment elasticities with respect to the change in 

the applicable minimum wage discussed in the previous 

section.

Elasticities for Directly Affected Adults. Much less 

research has been conducted on the responsiveness of 

adult employment to minimum-wage increases than on 

the responsiveness of teenage employment. Using the 

available information, CBO concluded that the elasticity 

for directly affected adults was about one-third of the 

elasticity for directly affected teenagers, and the agency 

12. A similar conversion was used in Charles Brown, “Minimum 

Wages, Employment, and the Distribution of Income,” in Orley 

Ashenfelter and David Card, eds., Handbook of Labor Economics, 

vol. 3B (Elsevier, 1999), pp. 2101–2163, http://tinyurl.com/

omxr3p7, and in David Neumark and William L. Wascher, 

Minimum Wages (MIT Press, 2008), http://mitpress.mit.edu/

books/minimum-wages. The conversion relies on the assertion 

that the increase in the minimum wage does not have a net effect 

on employment for workers earning more than the new minimum 

wage. As discussed earlier, CBO concluded that the research 

supports that assertion, with the exception of the increase in 

employment that would result from greater overall demand for 

goods and services. The adjustment made to account for that 

increase in employment is discussed in the section “How CBO 

Estimated the Total Effects of the Options on Employment.”

pdirect

%ΔMW

%ΔWdirect

edirect

%ΔEdirect

%ΔWdirect

----------------------- eliterature

pdirect

----------------- %ΔMW

%ΔWdirect

≡ = × -----------------------
26 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME FEBRUARY 2014

CBO

applied that proportional adjustment to the central estimates and likely ranges of elasticities for teens discussed 

above.

Some studies have found large elasticities for particular 

groups of adults, such as high school dropouts or African 

Americans in their 20s, but most of the adults who would 

be affected by the $9.00 and $10.10 options would not 

fall into those categories. A study that tracked directly 

affected adults regardless of their education, age, or 

race suggests that their employment is less sensitive to 

increases in the minimum wage than that of directly 

affected teenagers. One explanation for that lower degree 

of responsiveness is that employers facing an excess of 

workers or of job applicants tend to favor adults over 

teenagers. Supporting that explanation is research suggesting that encouraging employment among low-wage 

parents reduces employment among younger, childless 

adults. 

CBO also reviewed studies that examined the response of 

employment to changes in the minimum wage for other 

groups of workers, such as those in particular industries. 

Those results were broadly consistent with CBO’s findings for teenagers and adults after being adjusted to 

avoid apples-to-oranges comparisons. For example, 

several studies of the food and drink industry measured 

elasticities in terms of the change in all employment in 

the industry stemming from a change in the applicable 

minimum wage. Many of the employees at those businesses did not have wages low enough to be directly 

affected by a minimum-wage change; that factor largely 

accounts for differences between the smaller elasticities 

typically reported in studies of the food-and-drink industry and CBO’s estimates of elasticities for directly affected 

workers.

How CBO Estimated the Total 

Effects of the Options on Employment

CBO’s central estimates that the $10.10 and 

$9.00 options would reduce employment by roughly 

500,000 and 100,000 workers, respectively, were based 

on four main factors. Two were discussed above: the 

number of low-wage workers directly affected by the 

options and the responsiveness of the employment of 

low-wage workers to increases in minimum wages. The 

remaining two factors were the change in the wages of 

directly affected workers and the increase in demand for 

goods and services caused by each option. To calculate 

the total effect on employment, CBO multiplied estimates of the first three factors together for teenagers; did 

the same for adults; added the results; and then added an 

amount to account for the fourth factor. To reflect the 

considerable uncertainty in estimating the total employment effect, CBO also reported a range within which, in 

the agency’s assessment, there was about a two-thirds 

chance that the actual effect would lie.

The Increase in the Wages of

Directly Affected Workers

CBO first projected wages for all workers in 2016 under 

current law; it then increased wages that would be below 

the new minimum wage under consideration to equal 

that new minimum. The difference between the directly 

affected workers’ wages before and after that adjustment 

was used to calculate the average percentage changes in 

directly affected workers’ wages (before accounting for 

job losses caused by the minimum-wage increase). Under 

the $10.10 option, CBO projects average percentage 

changes of about 18 percent for teenagers and 14 percent 

for adults. The projected changes are smaller under the 

$9.00 option—10 percent for teenagers and 8 percent for 

adults. All those percentage changes are lower than the 

percentage changes in the minimum wage itself because 

most low-wage workers in 2016 would earn more than 

$7.25 under current law.

The Increase in Demand for Goods and Services

Raising the minimum wage would have four direct effects 

on the aggregate demand for goods and services. First, 

consumption would be reduced among people who 

became jobless because of the minimum-wage increase. 

In estimating that effect, CBO accounted for lower 

savings and some borrowing by people who would 

thereby avoid a sharp reduction in their standard of living. Second, additional spending by affected workers 

with earnings increases would boost demand. Third, 

demand would be reduced because business owners and 

shareholders would absorb part of the cost of the minimum-wage increase in the form of reduced profits and 

therefore would reduce their spending. Fourth, demand 

would also be reduced because affected employers would 

pass part of their increased costs on to consumers in the 

form of higher prices for goods and services; those higher 

prices would reduce the average consumer’s purchasing 

power, resulting in less spending by consumers after 

adjusting for inflation. (For examples of the research that 

CBO reviewed on these topics, see Appendix B.)
APPENDIX A THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME 27

CBO

On balance, according to CBO’s analysis, raising the 

minimum wage would increase demand for goods and 

services because, taken together, the second, third, and 

fourth direct effects would shift income from business 

owners and consumers (as a whole) to low-wage workers. 

Low-wage workers generally spend a larger share of each 

dollar they receive than the average business owner or 

consumer does; thus, when a dollar from business owners 

or consumers is shifted to low-wage workers, overall 

spending increases. The increase in demand from that 

shifting of income would be larger than the decrease in 

demand from the reduced consumption of people who 

became jobless, CBO estimates.

Increasing the minimum wage would also have indirect 

effects on demand that could either enhance or reduce 

the direct effects. For instance, the greater demand for 

goods and services just described would prompt some 

companies to increase investment to bolster their future 

production, further boosting demand. But higher prices 

of goods and services sold by companies employing 

minimum-wage workers would cause consumers to shift 

their purchases to other companies, potentially creating 

bottlenecks until those companies adjusted to the 

increased demand. On net, the indirect effects would 

reduce demand, according to CBO’s central estimates. 

(Under current conditions, the indirect effects would 

increase demand, CBO estimates, but they would reduce 

demand in 2016 because the economy will be stronger 

and the Federal Reserve would therefore be more active in 

offsetting the direct increase in demand by raising interest 

rates.)

The increased demand for goods and services that would 

result from an increase in the minimum wage would have 

a short-term impact, boosting employment by a few tens 

of thousands of workers in the second half of 2016 under 

the $10.10 option, CBO estimates. The agency’s estimation approach was similar to the one that it used to assess 

the effects of the American Recovery and Reinvestment 

Act of 2009 (ARRA) and of various policies designed to 

increase output and employment—but adjusted to 

account for the much stronger economy projected for late 

2016.13 Specifically, CBO estimated the impact of both 

the $10.10 option and the $9.00 option on demand 

while accounting for both the direct and indirect effects. 

Then CBO estimated the effect of those changes in 

demand on productivity, hours worked per worker, and 

employment, using historical relationships as a guide. 

Changes in demand would affect employment gradually, 

over several quarters, because part of a rise in output 

would initially result in higher productivity and hours 

worked per worker, rather than in increased employment.

The overall increase in demand from boosting the minimum wage, and the resulting increase in employment, are 

represented in the findings of most previous research only 

to a small extent. For example, a study of impacts on 

directly affected workers captures the macroeconomic 

effects only on those workers, not on all workers. Also, a 

study of a minimum-wage increase in a given state may 

capture its effects on demand for in-state goods but not 

for out-of-state goods. After analyzing the importance 

of such factors, CBO concluded that previous research 

incorporated roughly 10 percent of the overall effects on 

aggregate demand. CBO therefore reduced its estimate of 

the economywide demand effects of a minimum-wage 

increase by about 10 percent to avoid double-counting 

those effects.

Uncertainty in the Estimates

CBO produced a range of estimates of the effect of 

increasing the minimum wage on employment by 

analyzing various sources of uncertainty. The three 

most important were the growth in wages of affected 

workers under current law over the next three years, 

the responsiveness of employment to changes in 

wages, and the extent to which an increase in aggregate 

demand because of higher labor earnings would increase 

employment. CBO concluded that two further sources of 

uncertainty—sampling variability in the CPS and the 

level of state minimum wages in 2016—were relatively 

insignificant.

To estimate a range of values for wage growth, CBO 

examined the history of wage growth rates and the extent 

to which those rates varied over three-year periods. To 

estimate a range for the responsiveness of employment to 

changes in wages, CBO used the elasticity ranges developed for the two options that were discussed above. CBO 

measured uncertainty in aggregate demand effects by 

13. See Congressional Budget Office, Estimated Impact of the 

American Recovery and Reinvestment Act on Employment and 

Economic Output From October 2012 Through December 2012

(February 2013), www.cbo.gov/publication/43945; and testimony 

of Douglas W. Elmendorf, Director, Congressional Budget Office, 

before the Senate Committee on the Budget, Policies for Increasing 

Economic Growth and Employment in 2012 and 2013 (November 

15, 2011), www.cbo.gov/publication/42717.
28 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME FEBRUARY 2014

CBO

using methods similar to those that it used in its analysis 

of ARRA.14

Building on those ranges of wage growth, elasticities, and 

aggregate demand effects, CBO generated simulations of 

effects on employment that incorporated the likelihood 

that wage growth could be higher or lower by a certain 

amount, the likelihood that elasticities could be larger or 

smaller to a certain extent, and other sources of uncertainty. CBO used the results of those estimates to form a 

range for the effect on employment of each policy option. 

There is a two-thirds chance, in CBO’s assessment, that 

the actual effects would be within the ranges reported.

How CBO Estimated the Effects of the 

Options on Family Income

CBO analyzed the effects on family income of the two 

options for increasing the federal minimum wage by 

comparing a projected distribution of family income in 

2016 under current law with the distribution that would 

prevail if the federal minimum wage was increased to 

either $10.10 or $9.00. The monthly data from the CPS 

that CBO used in its analysis of employment did not 

contain the information on family income necessary for 

this analysis, so CBO instead used data from the CPS 

Annual Social and Economic Supplement (ASEC) that 

was administered in March 2013, which reported family 

income and individuals’ earnings for calendar year 2012. 

Wages and Family Income Under Current Law

Before it could estimate the effect of the two options on 

family income in 2016, CBO needed to project family 

income under current law. CBO used a two-step process 

similar to the one that it used in its employment analysis—first calculating hourly wages and annual family 

income in 2012 and then using those calculations to 

project wages and family income in 2016.

Hourly Wages and Annual Family Income in 2012. 

CBO estimated the hourly wages of workers and annual 

income of families in 2012 by using data from the 2013 

ASEC. Workers’ hourly wages were calculated as their 

annual earnings divided by the number of hours they 

worked during the year (calculated as the number of 

hours they usually worked per week times the number of 

weeks they worked during the year).15 As in its analysis 

of employment, CBO adjusted workers’ calculated wages 

up or down to move their wage toward the average 

wage for workers with similar observable characteristics.

However, when CBO used those data to project workers’ 

wages in 2016, it found far fewer workers who would be 

directly affected by the change in the minimum wage 

than it had in its analysis of employment.16 The discrepancy probably arose because of greater measurement error 

in the ASEC than in the monthly CPS, which reports 

wages according to people’s responses to a direct question 

about how much they earn per hour. CBO therefore further adjusted the distribution of hourly wages calculated 

from the ASEC to match more closely the analogous distribution from the monthly CPS, mostly by adjusting 

some workers’ wages up to the minimum wage projected 

to apply to them in 2016 under current law.17

CBO also used the ASEC to measure the distribution 

of before-tax family cash income in 2012, which is the 

measure that the Census Bureau uses to determine the 

official poverty rate. That measure of income includes 

labor earnings, capital and business income, and other 

private sources of income, as well as cash transfers from 

the government, such as Supplemental Security Income 

(SSI) and Social Security (both Old-Age and Survivors

14. Felix Reichling and Charles Whalen, Assessing the Short-Term 

Effects on Output of Changes in Federal Fiscal Policies, Working 

Paper 2012-08 (Congressional Budget Office, May 2012), 

www.cbo.gov/publication/43278.

15. CBO did not exclude observations for which the Census Bureau 

imputed annual earnings, the number of hours of work per week, 

or the number of weeks worked per year.

16. To be consistent with the analysis of the number of workers 

affected by an increase in the minimum wage, CBO identified 

nontipped workers who were paid up to 25 cents less and tipped 

workers who were paid up to 13 cents less than the federal 

minimum wage—or the state minimum if it was higher—as 

workers who would be affected by a change in the minimum 

wage. 

17. As it did in estimating the number of affected workers, CBO 

identified tipped workers as those in 11 occupations (such as 

waiter, bartender, and hairdresser) whose compensation depends 

heavily on tips. Throughout its analysis, CBO applied to those 

workers the lower minimum wage for tipped workers.
APPENDIX A THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME 29

CBO

Insurance and Disability Insurance payments).18 It 

does not include noncash government transfers, such as 

benefits provided through the Supplemental Nutrition 

Assistance Program (SNAP), Medicaid, or Medicare, nor 

does it reflect the taxes people pay or the tax credits they 

receive, such as the earned income tax credit (EITC).

Projecting Hourly Wages and Annual Family Income in 

2016. CBO used the calculations described above and its 

forecasts of growth in wages and other income to project 

the distribution of hourly wages and annual family 

income in 2016.19 As in the employment analysis, the 

forecast of wage growth used for this analysis was smaller 

than the agency’s overall forecast of wage growth because 

CBO expects that very high-wage workers will experience 

faster wage growth in the next several years than other 

workers will.20 In addition, CBO accounted for prospective increases in some states’ minimum wages, including 

changes scheduled in current state laws and changes projected on the basis of how states have changed their minimum wages in the past.

To project family income in 2016, CBO used its forecasts 

of growth in the components of income when they were 

available—as they were for interest and dividends, for 

example. CBO projected that the other components of 

income will grow at the same rate that the price index for 

personal consumption expenditures does in CBO’s forecast. CBO estimated that the number of workers will 

increase according to the agency’s forecast of employment 

growth between 2013 and 2016. The rate of growth in 

the number of nonworking family members was similarly 

matched to the agency’s forecasts of growth in the 

nonworking population. 

Estimating the Effects of Increases in the

Minimum Wage on Family Income

The steps described above show how CBO formed an 

estimate of the distribution of hourly wages and family 

income in 2016 under current law. CBO then estimated 

how a higher minimum wage would affect family income 

in 2016. To do that, CBO first estimated the effect of an 

increase in the minimum wage on workers’ annual earnings. CBO then projected how that change in earnings, 

along with several other factors, would change family 

income.

Changes in the Annual Earnings of Workers. CBO estimated the effect of increases in the minimum wage on 

the annual earnings of low-wage workers using methods 

similar to those used in its analysis of employment. The 

higher wages of two groups were multiplied by the workers’ projected 2016 annual hours of work to estimate 

their annual earnings under the options. The first group 

consisted of workers who were projected to have wages 

lower than the new minimum in 2016 under current law. 

The second group consisted of workers whose projected 

wages in 2016 would be up to as much as $11.50; as in 

its analysis of the number of affected workers, CBO estimated that wages would rise for people in that category, 

on average. 

The wages of the first group were initially adjusted up to 

the new minimum, and then further adjustments for ripple effects were made in both groups. Specifically, those 

ripple effects were projected to extend up to the amount 

that would result from an increase that was 50 percent 

larger than the increase in their applicable federal or state 

minimum wage under either option. Ripple effects were 

included for workers whose wages under current law 

were projected to be slightly less and slightly more than 

the minimum wages under each option, respectively. The 

ripple effects were the largest for workers who, under current law, would have earned precisely the minimum wage 

that would be set under the option. On average, the ripple effects were substantially smaller than the increases in 

wages needed to bring workers up to the new minimum.

CBO’s analysis of annual earnings also accounted for 

reductions in employment—and therefore in some workers’ earnings—that would result from the increases in the 

minimum wage. Here, CBO used the same employment 

elasticities that it used in its analysis of the options’ effects 

on employment. Employment reductions were restricted 

to workers who would have had, under current law, an 

18. Specifically, before-tax family cash income includes wage and 

salary earnings; pension or retirement income; income from selfemployment, Temporary Assistance for Needy Families (TANF), 

Supplemental Security Income, Social Security, child support, 

unemployment compensation, workers’ compensation, disability 

benefits, educational assistance, and financial assistance from 

outside the household; and other cash income.

19. See Congressional Budget Office, The Budget and Economic 

Outlook: 2014 to 2024 (February 2014), www.cbo.gov/

publication/45010.

20. In addition, the Affordable Care Act’s requirement that many 

employers provide health insurance (or pay a penalty if they do 

not) will impose an additional cost on employers for some lowwage workers who do not currently have employment-based 

health insurance. CBO expects that the cost will ultimately be 

borne by workers through lower wages.
30 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME FEBRUARY 2014

CBO

hourly wage less than the new minimum. Workers who 

would have had wages between the new minimum and 

$11.50 were not considered to be at risk of losing 

employment as a result of the minimum-wage increase, 

as discussed above.

The reductions in employment would be concentrated 

more among teenage workers than among older workers, 

CBO expects, both because they tend to have lower 

wages and because their employment typically responds 

more sharply to changes in the minimum wage (as discussed above). Among workers at least 20 years old, CBO 

anticipates that the reductions in employment would be 

disproportionately concentrated among those who would 

have had the lowest wages under current law (apart from 

those to whom the minimum wage would not apply). 

Because many low-wage workers move in and out of 

employment within a year, CBO estimated the effects of 

the employment loss among low-wage workers by assuming that the affected people worked, on average, about 

half as many weeks as they otherwise would have; CBO 

therefore lowered projected earnings by 50 percent for 

twice as many workers as the projected number of people 

who would become jobless (rather than lowering earnings 

by 100 percent for a number of workers equal to the 

number of people who would become jobless). 

Changes in the Annual Income of Families. An increase in 

the minimum wage would not only affect family income 

by changing workers’ earnings. It would also result in 

losses in income for business owners, decreases in real 

income for many people because of increases in prices, 

and increases in some people’s income generated by 

higher demand for goods and services. To determine the 

economywide effect on total income, CBO subtracted 

the output lost because of the decline in employment 

from the output gained because of the increase in the 

aggregate demand for goods and services. On balance, the 

total amount of real income in the economy would 

increase by $2 billion in 2016 under the $10.10 option, 

CBO projects, and by $1 billion under the $9.00 option.

In CBO’s estimation, overall real income would increase 

for families with income less than six times the poverty 

threshold but would decrease for higher-income families, 

because both the income losses for business owners and 

the increase in prices would have the greatest effects on 

those higher-income families. In CBO’s estimation, 

about 1 percent of the reduction in real income from 

those two factors would fall on people living in families 

whose income was below the poverty threshold, whereas 

about 70 percent would fall on people living in families 

whose income was more than six times the poverty 

threshold.

CBO used those estimates of the change in income for 

families to project how many families would move into 

and out of poverty.21 Following the official definition of 

poverty, CBO did not consider the effects of a minimumwage increase on taxes, tax credits, or noncash transfer 

payments in its calculations. (CBO has not analyzed the 

effects of minimum-wage increases on a measure of 

income that accounts for taxes, tax credits, or noncash 

transfers.) Some of those effects would partly offset the 

gain to families from a higher minimum wage. For example, workers who received higher wages because of an 

increase in the minimum wage would pay more payroll 

taxes (though they would later be eligible for more Social 

Security benefits), and some of their families would be 

eligible to receive less in noncash means-tested benefits, 

such as those provided by SNAP. The amount of the 

EITC received by workers in poor families would increase 

in some cases and decrease in others, depending on each 

worker’s earnings and family income.

Uncertainty in the Estimates

There is considerable uncertainty about the effects of 

minimum-wage increases on family income. Some of the 

sources of uncertainty are the same as those in CBO’s 

analysis of employment; they involve wage growth, the 

elasticity of employment with respect to the change in the 

minimum wage, and the magnitude of the macroeconomic response that would result from the redistribution of income. However, there are some additional 

sources of uncertainty in the analysis of the options’ 

effects on family income. They include the following: 

 The effect on total income and on the income of 

families with different amounts of income is uncertain 

because of various factors, including how much 

spending varies by family income, the extent to which 

people avoid sharp changes in consumption when 

their income changes, the relative magnitudes of 

21. The Census Bureau’s poverty thresholds, which identify the 

income level below which families are classified as being in 

poverty, were projected to grow at the same rate that CBO forecast 

for growth in the consumer price index for urban consumers, or 

CPI-U. That approach is consistent with the fact that poverty 

thresholds are updated annually for inflation with the CPI-U.
APPENDIX A THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME 31

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profit reductions and price increases by firms paying 

increased wages, and the magnitude of indirect effects 

on demand. 

 It is uncertain how the reduction in employment 

resulting from a minimum-wage increase would be 

distributed among families during 2016. In its 

analysis, CBO distributed that employment reduction 

among families on the basis of the age and the wages 

under current law of the workers who live in those 

families. Alternative distributions would produce 

different effects on family income and poverty.

 The effect of a higher minimum wage on the behavior 

of other people who live in low-wage workers’ families 

is uncertain. For example, someone in that situation 

might work fewer hours in response to a spouse’s 

higher earnings—or more hours, if the spouse lost 

employment as a result of the higher minimum wage. 

In general, such responses would probably offset to 

some extent the effects of the options on low-wage 

workers’ family income. 

Comparing CBO’s Approach With Other Approaches

CBO’s estimates of the effect of increasing the minimum 

wage on family income are based on a “simulation” 

approach.22 That is, CBO estimated what the 

distribution of family income was likely to be in 2016 

under current law and then projected how a higher minimum wage would alter that distribution by projecting 

wages and employment (and then earnings and family 

income). CBO then projected the effect on the poverty 

rate by comparing each family’s poverty status under current law with its poverty status under the two options.

An alternative approach to forecasting the effect of a 

minimum-wage increase on poverty rates is to estimate 

the historical correlation between the poverty rate and the 

minimum wage and to use that correlation to project a 

change in the poverty rate for a given change in the minimum wage. Some of the estimates produced by studies 

taking that approach would imply that the $10.10 policy 

would reduce poverty by more than CBO has estimated. 

(See Appendix B for examples of such studies.)

There are several reasons that the two approaches may 

yield different results. It might be, for example, that 

CBO’s analysis underestimates the increase in income 

that would accrue to poor families if the minimum wage 

was increased. That underestimate might occur if the 

minimum wage raised earnings for workers projected to 

have wages above the new minimum by more than CBO 

has estimated. It might also be that an increase in the 

minimum wage would alter family structure—through 

increased marriage rates, for example—in ways that 

reduced the number of families whose income was below 

the poverty threshold; such effects would be captured in 

the historical correlation approach but not in CBO’s simulation approach. Alternatively, the effect on poverty of a 

minimum-wage increase might vary over time—for 

example, if the number of low-wage workers in families 

with income near the poverty threshold varied over time. 

If that was true, the correlation analysis might be less 

informative than CBO’s simulation method, which uses 

more current data.

22. Also, CBO’s analysis of income focuses on family income, in part 

because that is how official poverty measures are determined. 

Some analysts, however, have focused on households as the unit 

over which income is shared. CBO expects that the results using 

that alternative measure would yield qualitatively similar results, 

in this instance. 

CBO

Appendix B: 

Research About the Effects of 

Minimum-Wage Increases

To develop its estimates of the effects of minimumwage increases on employment and family income, the 

Congressional Budget Office (CBO) drew on the 

following research.

Reviews of Research About 

Employment Effects

For studies that analyze the central tendency of other 

studies’ estimates of employment effects, accounting for 

journals’ tendency to publish studies that find significant 

effects, see Dale Belman and Paul Wolfson, “Does 

Employment Respond to the Minimum Wage? A MetaAnalysis of Recent Studies From the New Minimum 

Wage Research,” in What Does the Minimum Wage Do? 

(Upjohn Institute, forthcoming), http://tinyurl.com/

p475ahg (PDF, 224 KB);

Hristos Doucouliagos and T. D. Stanley, “Publication 

Selection Bias in Minimum‐Wage Research? A MetaRegression Analysis,” British Journal of Industrial 

Relations, vol. 47, no. 2 (June 2009), pp. 406–428, 

http://dx.doi.org/10.1111/j.1467-8543.2009.00723.x; 

and

David Card and Alan B. Krueger, “Time-Series 

Minimum-Wage Studies: A Meta-Analysis,” American 

Economic Review: Papers and Proceedings, vol. 85, no. 2 

(May 1995), pp. 238–243, www.jstor.org/stable/

2117925.

For reviews that examine the methods and data used in 

the research literature that estimates employment effects 

of the minimum wage, see Sylvia Allegretto and others, 

Credible Research Designs for Minimum Wage Studies, 

Discussion Paper 7638 (Institute for the Study of Labor, 

September 2013), http://tinyurl.com/ld9rwmg; and

David Neumark and William L. Wascher, “Minimum 

Wages and Employment,” Foundations and Trends in 

Microeconomics, vol. 3, no. 1–2 (March 2007), 

pp. 1–182, http://tinyurl.com/o7cngec.

For a review of the literature on the effect of Britain’s 

minimum wage (which was introduced in 1999), see Low 

Pay Commission, National Minimum Wage, Report 2013 

(April 2013), Chapter 2, pp. 19–74, http://tinyurl.com/

m6bbe93.

For a review of the literature on mechanisms that might 

explain small employment effects, see John Schmitt, Why 

Does the Minimum Wage Have No Discernible Effect on 

Employment? (Center for Economic and Policy Research, 

February 2013), http://tinyurl.com/b54lk8m.

For a literature review that covers a variety of effects, 

including the effects found in other countries, see David 

Neumark and William L. Wascher, Minimum Wages

(MIT Press, 2008), http://mitpress.mit.edu/books/

minimum-wages.

For reviews of that book, see Arindrajit Dube, “Minimum 

Wages. By David Neumark and William L. Wascher,” 

Journal of Economic Literature, vol. 49, no. 3 (September 

2011), http://dx.doi.org/10.1257/jel.49.3.719.r18; and

Richard V. Burkhauser, “Minimum Wages. By David 

Neumark and William L. Wascher,” Industrial and 

Labor Relations Review, vol. 64, no. 1 (September 2010), 

pp. 202–203, http://tinyurl.com/o3gy5bg.
34 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME FEBRUARY 2014

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For a review of the research literature before 1999, see 

Charles Brown, “Minimum Wages, Employment, and 

the Distribution of Income,” in Orley C. Ashenfelter 

and David Card, eds., Handbook of Labor Economics, 

vol. 3, part B (Elsevier, 1999), pp. 2101–2163, 

http://tinyurl.com/mmkdrme. 

For an early review of the literature from an international 

perspective, see Organisation for Economic Co-operation 

and Development, “Making the Most of the Minimum: 

Statutory Minimum Wages, Employment and Poverty,” 

in OECD Employment Outlook 1998—Towards an 

Employment-Centred Social Policy (OECD Directorate for 

Labour and Social Affairs, June 1998), Chapter 2, http://

tinyurl.com/q6rs9a2.

For an early review of the new minimum-wage research 

from the first half of the 1990s, see David Card and Alan 

B. Krueger, Myth and Measurement: The New Economics 

of the Minimum Wage (Princeton University Press, 1995), 

http://press.princeton.edu/titles/5632.html.

For a very early review of the literature, see Charles 

Brown, Curtis Gilroy, and Andrew Kohen, “The Effect of 

the Minimum Wage on Employment and 

Unemployment,” Journal of Economic Literature, vol. 20, 

no. 2 (June 1982), pp. 487–528, www.jstor.org/stable/

2724487.

Other Research About 

Employment Effects

CBO also considered the following studies, which are 

generally too recent to have been covered by the reviews 

listed above. 

For studies focused on employment among teenagers, 

see Laura Giuliano, “Minimum Wage Effects on 

Employment, Substitution, and the Teenage Labor 

Supply: Evidence From Personnel Data,” Journal of Labor 

Economics, vol. 31, no. 1 (January 2013), pp. 155–194, 

http://dx.doi.org/10.1086/666921;

Yusuf Soner Baskaya and Yona Rubinstein, “Using 

Federal Minimum Wages to Identify the Impact of 

Minimum Wages on Employment and Earnings Across 

the U.S. States” (draft, Department of Economics 

Workshop, University of Chicago, December 2012), 

http://tinyurl.com/lmjohgl (PDF, 580 KB); and

Sylvia A. Allegretto, Arindrajit Dube, and Michael Reich, 

“Do Minimum Wages Really Reduce Teen Employment? 

Accounting for Heterogeneity and Selectivity in 

State Panel Data,” Industrial Relations, vol. 50, no. 2 

(April 2011), pp. 205–240, http://dx.doi.org/10.1111/

j.1468-232X.2011.00634.x.

For a recent study that focuses on how the effects of 

minimum-wage increases vary with economic conditions, 

see John T. Addison, McKinley L. Blackburn, and 

Chad D. Cotti, “Minimum Wage Increases in a 

Recessionary Environment,” Labour Economics, vol. 23 

(August 2013), pp. 30–39, http://dx.doi.org/10.1016/

j.labeco.2013.02.004.

For analyses of changes in employment in industries 

where low wages are prevalent, see William E. Even and 

David A. Macpherson, “The Effect of the Tipped 

Minimum Wage on Employees in the U.S. Restaurant 

Industry,” Southern Economic Journal, vol. 80, no. 3 

(January 2014), pp. 633–655, http://tinyurl.com/

kv6fz6c;

Jonathan Meer and Jeremy West, Effects of the Minimum 

Wage on Employment Dynamics (draft, Texas A&M 

University, December 2013), http://tinyurl.com/cllro5p

(PDF, 2.9 MB).

Arindrajit Dube, Minimum Wages and Aggregate Job 

Growth: Causal Effect or Statistical Artifact? Discussion 

Paper 7674 (Institute for the Study of Labor, October 

2013), http://tinyurl.com/kx6t2yz;

David Neumark, J. M. Ian Salas, and William Wascher, 

Revisiting the Minimum Wage-Employment Debate: 

Throwing Out the Baby With the Bathwater? Working 

Paper 18681 (National Bureau of Economic Research, 

January 2013), www.nber.org/papers/w18681;

John T. Addison, McKinley L. Blackburn, and Chad D. 

Cotti, “The Effect of Minimum Wages on Labour 

Market Outcomes: County-Level Estimates from the 

Restaurant-and-Bar Sector,” British Journal of Industrial 

Relations, vol. 50, no. 3 (September 2012), pp. 412–435, 

http://tinyurl.com/ot9apya; and

Arindrajit Dube, T. William Lester, and Michael Reich, 

“Minimum Wage Effects Across State Borders: Estimates 

Using Contiguous Counties,” Review of Economics and 

Statistics, vol. 92, no. 4 (November 2010), pp. 945–964, 

http://dx.doi.org/10.1162/rest_a_00039.
APPENDIX B THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME 35

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For recent studies that examine changes in employment 

among a variety of groups that earn low wages, on 

average, see Arindrajit Dube, T. William Lester, and 

Michael Reich, Minimum Wage Shocks, Employment Flows 

and Labor Market Frictions, Working Paper 149-13 

(Institute for Research on Labor and Employment, June 

2013), www.irle.berkeley.edu/workingpapers/149-13.pdf

(3.4 MB); and

Joseph J. Sabia, Richard V. Burkhauser, and Benjamin 

Hansen, “Are the Effects of Minimum Wage Increases 

Always Small? New Evidence From a Case Study of 

New York State,” Industrial and Labor Relations Review, 

vol. 65, no. 2 (April 2012), pp. 350–376, http://

tinyurl.com/mn566b3. 

For examples of earlier studies about effects on adults 

with low wages, see David Neumark, Mark Schweitzer, 

and William Wascher, “Minimum Wage Effects 

Throughout the Wage Distribution,” Journal of Human 

Resources, vol. 39, no. 2 (Spring 2004), pp. 425–450, 

http://tinyurl.com/ncgswlg;

David Neumark, “The Employment Effects of Minimum 

Wages: Evidence From a Prespecified Research Design,” 

Industrial Relations, vol. 40, no. 1 (January 2001), pp. 

121–144, http://dx.doi.org/10.1111/0019-8676.00199;

Richard V. Burkhauser, Kenneth A. Couch, and David C. 

Wittenburg, “Who Minimum Wage Increases Bite: An 

Analysis Using Monthly Data From the SIPP and the 

CPS,” Southern Economic Journal, vol. 67, no. 1 (July 

2000), pp. 16–40, www.jstor.org/stable/1061611; and

Donald Deere, Kevin M. Murphy, and Finis Welch, 

“Employment and the 1990–1991 Minimum-Wage 

Hike,” American Economic Review, vol. 85, no. 2 (May 

1995), pp. 232–237, www.jstor.org/stable/2117924. 

For examples of research on the long-term effects of 

changes in minimum wages, see Isaac Sorkin, “Are 

There Long-Run Effects of the Minimum Wage?” 

(draft, University of Michigan, October 2013), 

https://sites.google.com/site/isaacsorkin/papers; 

Dale L. Belman and Paul Wolfson, “The Effect of 

Legislated Minimum Wage Increases on Employment 

and Hours: A Dynamic Analysis,” Labour, vol. 24, no. 1 

(March 2010), pp. 1–25, http://tinyurl.com/nhp7mth; 

and

Michael Baker, Dwayne Benjamin, and Shuchita Stanger, 

“The Highs and Lows of the Minimum Wage Effect: A 

Time-Series Cross-Section Study of the Canadian Law,” 

Journal of Labor Economics, vol. 17, no. 2 (April 1999), 

pp. 318–350, http://dx.doi.org/10.1086/209923.

For a reexamination of earlier research using time series 

methods, see Nicolas Williams and Jeffrey A. Mills, “The 

Minimum Wage and Teenage Employment: Evidence 

From Time Series,” Applied Economics, vol. 33, no. 3 

(February 2001), pp. 285–300, http://dx.doi.org/

10.1080/00036840122088.

Research About Family Income Effects

For analysis of the effects of minimum-wage changes on 

family income and the poverty rate, see Joseph J. Sabia 

and Robert B. Nielsen, “Minimum Wages, Poverty, and 

Material Hardship: New Evidence From the SIPP,” 

Review of Economics of the Household (January 2013), 

http://dx.doi.org/10.1007/s11150-012-9171-8;

Arindrajit Dube, “Minimum Wages and the Distribution 

of Family Incomes” (draft, University of Massachusetts, 

Amherst, December 2013), http://tinyurl.com/muab8nc

(PDF, 1.52 MB);

David Neumark and William Wascher, “Does a Higher 

Minimum Wage Enhance the Effectiveness of the 

Earned Income Tax Credit?” Industrial and Labor 

Relations Review, vol. 64, no. 4 (July 2011), pp. 712–746, 

http://tinyurl.com/looy95w;

Joseph J. Sabia and Richard V. Burkhauser, “Minimum 

Wages and Poverty: Will a $9.50 Federal Minimum Wage 

Really Help the Working Poor?” Southern Economic 

Journal, vol. 76, no. 3 (January 2010), pp. 592–623, 

http://dx.doi.org/10.4284/sej.2010.76.3.592;

Joseph J. Sabia, “Minimum Wages and the Economic 

Well-Being of Single Mothers,” Journal of Policy Analysis 

and Management, vol. 27, no. 4 (Autumn 2008), pp. 

848–866, http://dx.doi.org/10.1002/pam.20379;

Robert H. DeFina, “The Impact of State Minimum 

Wages on Child Poverty in Female-Headed Families,” 

Journal of Poverty, vol. 12, no. 2 (October 2008), 

pp. 155–174, http://dx.doi.org/10.1080/

10875540801973542;
36 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME FEBRUARY 2014

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Richard V. Burkhauser and Joseph J. Sabia, “The 

Effectiveness of Minimum-Wage Increases in 

Reducing Poverty: Past, Present, and Future,” 

Contemporary Economic Policy, vol. 25, no. 2 

(April 2007), pp. 262–281, http://dx.doi.org/10.1111/

j.1465-7287.2006.00045.x;

Congressional Budget Office, Response to a Request by 

Senator Grassley About the Effects of Increasing the Federal 

Minimum Wage Versus Expanding the Earned Income Tax 

Credit (attachment to a letter to the Honorable Charles 

E. Grassley, January 9, 2007), www.cbo.gov/publication/

18281;

David Neumark, Mark Schweitzer, and William Wascher, 

“Minimum Wage Effects Throughout the Wage 

Distribution,” Journal of Human Resources, vol. 39, 

no. 2 (Spring 2004), pp. 425–450, http://tinyurl.com/

ncgswlg;

Craig Gundersen and James P. Ziliak, “Poverty and 

Macroeconomic Performance Across Space, Race, and 

Family Structure,” Demography, vol. 41, no. 1 (February 

2004), pp. 61–86, http://dx.doi.org/10.1353/

dem.2004.0004;

David Neumark and William Wascher, “Do Minimum 

Wages Fight Poverty?” Economic Inquiry, vol. 40, no. 3 

(July 2002), pp. 315–333, http://dx.doi.org/10.1093/ei/

40.3.315;

David R. Morgan and Kenneth Kickham, “Children in 

Poverty: Do State Policies Matter?” Social Science 

Quarterly, vol. 82, no. 3 (September 2001), pp. 478–493, 

http://dx.doi.org/10.1111/0038-4941.00037;

Lonnie K. Stevans and David N. Sessions, “Minimum 

Wage Policy and Poverty in the United States,” 

International Review of Applied Economics, vol. 15, no. 1 

(2001), pp. 65–75, http://dx.doi.org/10.1080/

02692170120013358;

John T. Addison and McKinley L. Blackburn, 

“Minimum Wages and Poverty,” Industrial and Labor 

Relations Review, vol. 52, no. 3 (April 1999), pp. 393–

409, www.jstor.org/stable/2525141; and

David Card and Alan B. Krueger, Myth and Measurement: 

The New Economics of the Minimum Wage (Princeton 

University Press, 1995), http://press.princeton.edu/titles/

5632.html.

For related analyses of wage and employment spillovers 

from increases in minimum wages, see David Lee and 

Emmanuel Saez, “Optimal Minimum Wage Policy in 

Competitive Labor Markets,” Journal of Public Economics, 

vol. 96, no. 9–10 (October 2012), pp. 739–749, 

http://dx.doi.org/10.1016/j.jpubeco.2012.06.001;

Joseph J. Sabia, Richard V. Burkhauser, and Benjamin 

Hansen, “Are the Effects of Minimum Wage Increases 

Always Small? New Evidence From a Case Study of 

New York State,” Industrial and Labor Relations Review, 

vol. 65, no. 2 (April 2012), pp. 350–376, 

http://tinyurl.com/mn566b3;

David H. Autor, Alan Manning, and Christopher L. 

Smith, “The Contribution of the Minimum Wage to 

U.S. Wage Inequality Over Three Decades: A 

Reassessment,” Working Paper 16533 (National Bureau 

of Economic Research, November 2010), www.nber.org/

papers/w16533;

David Lee, “Wage Inequality in the United States During 

the 1980s: Rising Dispersion or Falling Minimum 

Wage?” Quarterly Journal of Economics, vol. 114, no. 3 

(August 1999), http://qje.oxfordjournals.org/content/

114/3.toc; and

Charles Brown, “Minimum Wage Laws: Are They 

Overrated?” Journal of Economic Perspectives, vol. 2, no. 3 

(Summer 1988), pp. 133–145, http://dx.doi.org/

10.1257/jep.2.3.133.

Research About Other Effects

For research about consumption and price effects, see 

Daniel Aaronson, Sumit Agarwal, and Eric French, The 

Spending and Debt Responses to Minimum Wage Increases, 

Working Paper 2007-23 (Federal Reserve Bank of 

Chicago, revised February 2011), http://tinyurl.com/

7z5sgcc;

Daniel Aaronson, “Price Pass-Through and the 

Minimum Wage,” Review of Economics and Statistics, 

vol. 83, no. 1 (February 2001), pp. 158–169, 

http://dx.doi.org/10.1162/003465301750160126; and

David Card and Alan Krueger, Myth and Measurement

(Princeton University Press, 1995), 

http://press.princeton.edu/titles/5632.html.
APPENDIX B THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME 37

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For a review of the literature on the implications of 

technological change for low-wage workers, see 

Daron Acemoglu and David Autor, “Skills, Tasks and 

Technologies: Implications for Employment and 

Earnings,” in David Card and Orley C. Ashenfelter, eds., 

Handbook of Labor Economics, vol. 4, part B (Elsevier, 

2011), pp. 1043–1171, http://dx.doi.org/10.1016/

S0169-7218(11)02410-5. 

For research about fringe-benefit effects, see Brooks 

Pierce, “Recent Trends in Compensation Inequality,” in 

Katharine G. Abraham, James R. Spletzer, and Michael 

Harper, eds., Labor in the New Economy (University of 

Chicago Press, 2010), pp. 63–98, http://papers.nber.org/

books/abra08-1;

Kosali Ilayperuma Simon and Robert Kaestner, “Do 

Minimum Wages Affect Non-Wage Job Attributes? 

Evidence on Fringe Benefits,” Industrial and Labor 

Relations Review, vol. 58, no. 1 (October 2004), 

pp. 52–70, http://tinyurl.com/o8lrxjh; and

Masanori Hashimoto, “Minimum Wage Effects on 

Training on the Job,” American Economic Review, vol. 72, 

no. 5 (December 1982), pp. 1070–1087, www.jstor.org/

stable/1812023.
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List of Tables and Figures

Tables

1. Estimated Effects on Employment, Income, and Poverty of an Increase in the 

Federal Minimum Wage, Second Half of 2016 2

2. Projected Characteristics of Low-Wage Workers, Second Half of 2016 10

3. Projected Shares of Workers, by Family Income Group, Second Half of 2016 13

4. Estimated Effects on Average Real Family Income of an Increase in the 

Federal Minimum Wage, Second Half of 2016 14

A-1. Comparing Changes in the Federal Minimum Wage Since 1980 With Changes 

Under the Two Options 24

Figures

1. Workers’ Hourly Wages and the Federal Minimum Wage, 1973 to 2018 5

2. Shares of All Workers, by States’ Applicable Minimum Wage, 2014 6

3. Estimated Effects on Real Family Income of an Increase in the 

Federal Minimum Wage, Second Half of 2016 12
FEBRUARY 2014 THE EFFECTS OF A MINIMUM-WAGE INCREASE ON EMPLOYMENT AND FAMILY INCOME 39

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About This Document

This Congressional Budget Office (CBO) report was prepared in response to interest expressed by a 

number of Members of Congress. In keeping with CBO’s mandate to provide objective, impartial 

analysis, the report contains no recommendations.

Nabeel Alsalam, William Carrington, Molly Dahl, and Justin Falk prepared the report, with 

contributions from Sarah Masi, Benjamin Page, Felix Reichling, Robert Stewart, and David Weiner 

and with guidance from Joseph Kile. Christina Hawley Anthony, Sheila Campbell, Wendy Edelberg, 

Peter Fontaine, Heidi Golding, Patrice Gordon, Edward Harris, Chung Kim, Joyce Manchester, 

Alexandra Minicozzi, Damien Moore, Sam Papenfuss, Jonathan Schwabish, Chad Shirley, and 

Rebecca Verreau of CBO provided helpful comments. Charles Brown of the University of Michigan, 

Richard Burkhauser of Cornell University, Harry Holzer of Georgetown University, Lawrence Katz of 

Harvard University, Alan Krueger of Princeton University, Casey Mulligan of the University of 

Chicago, and William Wascher of the staff of the Board of Governors of the Federal Reserve System 

provided comments about CBO’s analytical approach. (The assistance of external reviewers implies no 

responsibility for the final product, which rests solely with CBO.)

Jeffrey Kling and Robert Sunshine reviewed the report, Benjamin Plotinsky edited it, and Jeanine Rees 

prepared it for publication. The report is available on the agency’s website (www.cbo.gov/publication/

44995).

Douglas W. Elmendorf 

Director

February 2014