Can Raising the Minimum Wage Cut Medicaid Costs?

Pennsylvania's governor is using that logic to persuade lawmakers to adopt the nation's highest minimum wage. Not everyone is convinced.
by | May 8, 2017
Pennsylvania Gov. Tom Wolf shakes hands with customers in a diner. (AP/Matt Rourke)

While Congress decides what to do with the Affordable Care Act, state officials are left to grapple with policies that are in their control. In Pennsylvania Gov. Tom Wolf's case, that means focusing on reducing Medicaid spending.

The way he's proposed to cut those costs is unconventional and unproven: He wants to raise the state's minimum wage to $12 an hour.

Doing so, his administration claims, would lift 100,000 people out of Medicaid and save the state an estimated $50 million a year.

Pennsylvania’s minimum wage is $7.25, the same as the federal level. If passed, the state would have the highest minimum wage in the country. Only four other states -- California, Connecticut, Massachusetts and Washington -- plus the District of Columbia have a minimum wage higher than $10 an hour.

"It’s an underexplored topic, and we don’t have a lot of evidence on this issue,” says Christine Eibner, senior economist at the RAND Corporation.

That isn't stopping Pennsylvania's governor from exploring it.

While Medicaid savings may be realized by raising the minimum wage, business groups are against the proposal either way. They argue that the potential economic drawbacks outweigh the social benefits and savings.

A report from the state's Independent Fiscal Office last month found that raising the minimum wage could cause the state to lose 54,000 jobs.

“The governor has good intentions, but there’s a real disconnect between policy proposals and the reality,” says Alex Halper, director of government affairs at the Pennsylvania Chamber of Business and Industry. “There are better ways to help low-income families that don’t trigger this kind of job loss."

Halper says the state had a hard time bouncing back from the recession, and many small businesses are operating on thin profit margins.

State officials, however, argue that raising the minimum wage would help small businesses by helping low-wage workers afford to be more frequent customers.

“You’re putting money in the pocket of people who want to patronize your business,” says Ted Dallas, Pennsylvania’s human services secretary.

Some of Wolf's projected savings might be voided because the state would have to pay higher wages to public and state-subsidized employees not making $12 an hour. But Dallas says that the state would still save enough money to reinvest in those services.

Dallas also says the governor's office has done their homework and that the $12 number isn’t arbitrary. Raising the minimum wage by just a dollar or two wouldn’t make a difference, and $15 -- something many liberal politicians have been advocating for -- would end up costing the state money.

"There's a sweet spot there," he says.

To avoid a political fallout, Eibner from RAND says Nevada could be a model for states looking to strike a deal on the minimum wage. The state has a different minimum wage depending on whether employers offer health benefits. Residents working a minimum wage job with health benefits earn $7.25 an hour, and those who don’t have health benefits make $8.25.

Dallas concedes that it’s a proposal that won’t happen overnight and will take some political heavy lifting and negotiations.

“It will certainly be a discussion, but I’m always optimistic,” he says.