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How do minimum wage increases affect expenditures on means-tested public assistance programs?

At a time when concern over income inequality is growing—and there is contentious debate about government deficit spending—the possibility that a higher minimum wage may affect public assistance spending holds great relevance for both the public and policymakers. This possibility is particularly salient in the 24 states that have not expanded Medicaid under the Affordable Care Act, or ACA, as of January 2014.

In this paper, we suggest a strategy whereby states can simultaneously expand health care, boost the income of working families, and generate savings in their state budget by raising the minimum wage in conjunction with expanding Medicaid. Higher minimum wages will boost income among struggling working families. Medicaid expansion will lead to wider health care coverage, as well as a reduction in the number of uninsured and the significant public costs associated with the care of the uninsured.

This report finds that higher minimum wages lead to a statistically significant enrollment reduction in traditional Medicaid—that is, the portion of Medicaid for which states have always paid a substantial share of the cost. Specifically, the results of the econometric analysis developed in this report imply that a 10 percent increase in the minimum wage reduces traditional Medicaid enrollment among the non-elderly and non-disabled by 0.31 percentage points.

Thus, considered alongside Medicaid savings for states, the dual policy package of Medicaid expansion and higher minimum wages represents a win-win situation for state policymakers and low-income working families. Unlike states’ traditional Medicaid programs, the federal government pays the full cost of care for those who are newly eligible for the first three years—and the lion’s share thereafter—under the Medicaid expansion. This reduction in enrollment will lead states and their residents to save money on traditional Medicaid.

For the 24 states that did not expand Medicaid under the ACA beginning in 2014—the so-called nonexpansion states—our results imply that if implemented in 2014, a $10.10 per hour minimum wage coupled with Medicaid expansion would reduce states’ pre-ACA Medicaid expenditures by more than $2.5 billion per year. This represents a spending decrease of more than 1.5 percent among the nonexpansion states and 0.6 percent relative to national 2012 Medicaid expenditures. To arrive at these findings, we take account of the states’ 2014 minimum wage levels and use baseline Medicaid enrollment data from the year 2012, the most recent year for which data are available in our set.

If states chose to index their minimum wages to a measure of inflation—ensuring that the purchasing power afforded by the minimum wage would rise at the same rate as prices in the future—their respective minimum wages would increase at the same rate as Medicaid eligibility thresholds, which are tied to the federal poverty level, or FPL. Accordingly, the savings over a decade would be about 10 times greater than the one-year savings. In 2014 dollars, the 10-year savings across nonexpansion states would total approximately $25.1 billion.

The report proceeds as follows:

Section 1 provides background information on minimum wage policies and on the Medicaid program and discusses the interaction between them.

Section 2 describes the data we use and discusses our methods.

Section 3 provides our main results. We present a state-by-state simulation of the savings to states from increasing minimum wages to $10.10 per hour during Medicaid expansion.

Section 4 presents our conclusion.

Further details are provided in a series of appendices.