How the Low Minimum Wage Helps Rich Companies

Low wages benefit employers at the expense of both workers and taxpayers.

An illustration of a construction crane lifting coins.
Getty / The Atlantic

The country’s very low minimum wage comes at a high cost. And for taxpayers, it adds up to more than $100 billion a year.

That number comes from a new analysis of safety-net usage by Ken Jacobs, Ian Eve Perry, and Jenifer MacGillvary of UC Berkeley’s Labor Center. It identifies working families with at least one member who would get a raise if the federal minimum wage were lifted to $15 an hour, and finds that the government spends about $107 billion a year on Medicaid, the Children’s Health Insurance Program (CHIP), cash welfare, food stamps, and the earned-income tax credit for those families.

Raising the minimum wage would not just help them escape poverty. It would also help the government’s bottom line, by freeing up resources to spend on other anti-poverty priorities, such as child care, housing subsidies, and homelessness-prevention initiatives.

“The public-safety-net programs are extremely important and underfunded, and so this would allow greater support in other areas of need, which would then have an extremely positive effect on low-wage working families and lower-income families overall,” Jacobs, the chair of the Labor Center, told me.

This research comes as the incoming administration vows to more than double the federal minimum wage, to $15. Last week, President-elect Joe Biden said he hoped Democrats’ winning control of the Senate would “raise the odds of prompt action,” adding that “no one who works 40 hours a week in America should still live below the poverty line.”

But many do. Full-time workers making the federal minimum wage bring home just $15,080 a year; all in all, 11 percent of American workers earn poverty wages. This is a straightforward product of policy, a chosen technocratic outcome. The federal minimum wage has languished at a measly $7.25 an hour since 2009. That leaves it roughly one-third lower than it was in 1968, in inflation-adjusted terms, despite the fact that the country is now much richer and the economy far bigger. The Economic Policy Institute has estimated that workers earning the minimum wage make $7,000 less each year than their grandparents did half a century ago, in real terms.

The low minimum wage is one reason so many Americans working full-time or close to full-time still need government assistance. The new Berkeley study shows that, in the 42 states that have not passed a $15 minimum wage, two-thirds of fast-food workers are enrolled in a safety-net program or have a family member enrolled in one. That is true for half of child-care workers and 62 percent of home-care workers, too. These jobs are held disproportionately by women, as well as by Black and Latino workers.

Taiwanna Milligan, a single mother who lives in rural South Carolina and makes $8.25 an hour at a fast-food restaurant, talked me through her financial situation. Even in an area with a low cost of living, her family just scrapes by. They do not always have enough to eat, and she skips meals to make sure her kids and her mother get enough.

She worked full-time until recently. But when her arthritis worsened, she pulled back on her hours, despite the financial strain she knew this would cause. As a consequence, she said, she had to get rid of her car, because she could no longer make the insurance and tax payments on it. “I have to get a friend to take me around or just get out and start walking until somebody stops,” she told me. “There’s no bus or transit service out here.” She qualifies for Medicaid, and her son, who has sickle-cell disease, has medical coverage through CHIP. Yet they still struggle to obtain adequate care. “Sometimes we have to put out co-pays just to be seen,” she told me. “I just can’t pay that, because I don’t earn enough.”

Raising the minimum wage to $15 would be life-changing for families like Milligan’s. And with more families able to live off their paychecks, the government would have more resources to address deep poverty, poverty among kids, and issues like homelessness. Indeed, the country’s safety net is more extensive than ever before, but it has become more and more geared toward income support and insurance coverage for the working poor, with fewer resources going to the country’s very poorest.

Some argue that the government is subsidizing poverty wages through its working-family benefit programs—padding the bottom lines of fast-food franchises and big-box stores, while also helping financially stressed workers. Jacobs pushed back on that point; the earned-income tax credit does act as a straightforward wage subsidy, he said, but the evidence is unclear when it comes to other programs.

Still, millions of workers are employed in jobs unremunerative enough that government assistance is necessary just to get by: Managers at fast-food joints recommend that their workers get on food stamps (SNAP), employees advise one another on obtaining tax credits and WIC. A low minimum wage—combined with weak mandates for companies to offer benefits and paid leave, regulations that make unionization difficult, and lax labor standards in general—benefits low-wage employers at the expense of both workers and taxpayers. There is no way to get by on what workers like her make, Mendy Hughes, a Walmart cashier in Arkansas, told me. She said she had to take out a loan to cover her bills when she stopped working so she could have knee surgery.

Raising the minimum wage would shift that equilibrium, and please voters in both parties. Americans support the $15 minimum by a large margin; even among Republicans, a majority supports pay increases. Just look at what happened in Florida, a purplish state trending redder, this past election. Its voters rejected Biden’s candidacy, but passed a ballot initiative pushing the state’s minimum wage from $8.56 to $15 by 2026.

It will join a huge slate of states, cities, and large businesses that have raised their minimum wage, absent federal action. All in all, the eight-year-old, union-backed Fight for $15 movement has helped deliver $68 billion in raises for 22 million American workers, prompting strong wage growth for the lower end of the income spectrum before the pandemic recession.

To help folks stand on their own two feet, the government can’t just make people work. It has to make work pay. The cost of low wages is too high for the country’s working families. And it’s too high for Uncle Sam as well.