The enhanced unemployment benefits of the CARES Act are set to expire at the end of July. Given the continued COVID-19 health and economic crisis, these need to be extended in some form for the sake of the unemployed and the economy.
A policy quandary with these benefits is that a number of low-wage workers are earning more by being unemployed with the enhanced benefits than they did by working. As such, some are calling for the benefits to be cut while others are calling for the unemployed in this predicament to be able to return to work but with a government subsidy or bonus so there is an incentive to return to work.
In addition to the unemployed, many lower-wage workers who have kept their jobs, particularly front-line essential workers, received so-called hero bonuses from their private employers to boost their pay. Unfortunately, several employers have already begun cutting back or eliminating such extra pay.
The real policy elephant in the room should not be that temporary unemployment benefits are too generous and that hero bonuses are too fleeting, it should be that the lowest wages are simply too low. The temporary benefits and bonuses that have been needed in the short run are putting into sharp relief the inadequacies of the lowest pre-COVID wages. The $600 a week CARES Act unemployment benefit bonus, which is on top of typical benefits, is alone the equivalent of $15 an hour for a 40-hour week. This is more than twice the current minimum wage. Going forward, we should not be shooting for a return to the pre-COVID normal on wages; we should shoot for a much better normal.
Last year the U.S. House passed a bill increasing the federal minimum wage to $15 an hour by 2025 in an attempt to raise the lowest wages. That went nowhere in the Senate. Some lawmakers argued that such a hike would have dampened economic growth. Now, during a major economic downturn, there will likely be arguments that this is no time to even discuss raising the federal minimum wage.
The problem with waiting is that the current federal minimum wage of $7.25 hasn’t been raised in over a decade and is less than the minimum wage in the 1960s, accounting for CPI measured inflation. This is the case despite the productivity improvements since then. If policymakers decide to wait to raise the minimum wage until after the economy and employment fully recover, recent history suggests that could take many years. By then the real, inflation adjusted minimum wage could fall to levels not seen any time after the 1940s.
Proposals to raise the minimum wage, like last year’s House bill, typically call for an annual set of increases gradually raising it, usually to $15 an hour, by 2025 or a year or two thereafter. Following that, annual increases would have it (at least) keep up with inflation or the median wage.
What could help push a federal minimum wage increase across the starting line in the current economy is if it were tied to relief for small and mid-sized businesses. For what would amount to a relatively small portion of the recent economic aid and relief packages, the federal government could subsidize the initial minimum wage step increases for smaller businesses (maybe even larger businesses in the short run). The cost would be in the tens of billions (not hundreds of billions or trillions), given the number of low-wage workers and the subsidy equivalent of one or two dollars an hour. This could be carried out via tax cuts and or refundable credits. It would be a bottom-up stimulus for low-wage, employed workers.
The subsidy should be designed to begin to fade away as unemployment drops below a certain threshold and the economy improves. The higher wages, however, would not fade away. The subsidy would strengthen the recovery, not dampen it, and provide a way to raise the minimum wage more in the initial step increase or two than has been considered in previous plans.
The federal minimum wage has now gone through the longest period without an increase. Raising it starting now, using a subsidy, and with greater initial step increases than last year’s House plan creates a bottom-up stimulus that boosts the economy and aids the lowest paid workers. With such a set of increases, wage and employment income would set off on a rising path for these workers just as temporary bonuses and government benefits are being reduced. Otherwise, back to normal will mean an income cut for far too many.
Patrick Walker is a fintech co-founder and director of research for a nonprofit research organization (PERC).
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