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Does Raising the Minimum Wage Save Money on Social Services?

Yes, experts say, but an extra dollar or two an hour won't free low-income people from poverty altogether.

Woman working cashier at McDonald's
This year will be an unprecedented one for minimum wage increases. The hourly salary floor in 18 states and 13 municipalities rose at the stroke of midnight on Jan. 1, and over the course of the year three more states, eight cities and the District of Columbia will be following suit. The increases range from a nickel-an-hour inflation adjustment in Alaska to a $2-an-hour jump in New York City. 

The year will likely be a test not only of advocates’ arguments that a higher minimum wage can be a crucial stepladder to help people rise out of poverty but also of the assertion that it can save states money on safety-net programs such as Medicaid and cash assistance.

The goal of cutting Medicaid costs was at the heart of Pennsylvania Gov. Tom Wolf’s proposal in 2017 to raise the minimum wage in his state from the federally mandated $7.25 an hour to $12. Wolf estimated that the move would lift 100,000 people out of the program and save the state $50 million annually. The proposal didn’t go anywhere, and ironically Pennsylvania is not among the states getting a minimum wage increase in 2019.

But the governor’s thinking was not flawed, according to some experts. “Without a doubt, raising the minimum wage will create savings for states in their Medicaid programs,” says David Cooper, who studies employment issues at the Economic Policy Institute. But Cooper cautions that saving money on safety-net programs shouldn’t be the main goal of efforts to raise the minimum wage. “With the savings you’re generating, we believe states should be expanding coverage and investing back into those programs,” Cooper says. “Just because someone might phase out of a program doesn’t mean that they don’t need support.”

Indeed, the fact that a person might be getting an extra dollar or two an hour doesn’t necessarily mean they’re going to be in a better financial situation. Jacob Vigdor, a professor of public policy at the University of Washington, studied the impact of Seattle’s 2014 ordinance raising the city’s minimum wage incrementally to $15 an hour in 2020. While higher-skilled workers did reap some benefits in terms of lower job turnover and improved economic security, Vigdor found that businesses cut work hours in some lower-skilled job categories. And while lower-skilled employees whose hours weren’t cut might be taking home more money, “their purchasing power isn’t really increasing,” he says. “They’re earning an extra $20 a week, but if their rent is going up $100 a month, it doesn’t matter much.”

There’s also the question of how minimum wage increases might play out in places that, unlike Seattle, don’t have the benefit of an economic powerhouse like Amazon that can afford such a mandate.

Arkansas and Missouri, for example, are among states getting minimum wage increases this year, and Vigdor wonders if businesses in their rural and suburban areas will be able pay the higher wage without significantly cutting workers’ hours. If that happens, he says, safety-net programs may be just as strained as they are now.

There is another factor that’s looming over all of these discussions: a potential economic downturn in the near future, which many economists are predicting. An influx of people on cash assistance, Medicaid and food stamps might swamp any savings resulting from minimum wage hikes. “You’re going to want some rainy day funds if you’re hoping that raising the minimum wage will offset costs elsewhere,” Vigdor says.

Mattie covers all things health for Governing.

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