More evidence–this time from CBO–that higher (even much higher) minimum wages largely do what they’re supposed to do.

July 8th, 2019 at 2:39 pm

Raising the federal minimum wage to $15 per hour by 2025 would lift the pay of 27.3 million workers—17 percent of the workforce—according to a new report from the Congressional Budget Office. It would raise the incomes of poor families by 5 percent and thus reduce the number of people in poverty by 1.3 million. Since these low-end gains would be partially financed out of profits, the increase in the wage floor would reduce inequality.

CBO also estimates that “1.3 million workers who would otherwise be employed would be jobless in an average week in 2025.” Because economists’ estimates of the job-loss effects from minimum wage increase are so wide-ranging—some studies find little-to-no job loss impacts; other find more—CBO estimates that there’s a two-thirds chance that the actual change in employment is between 0 and -3.7 million. Interestingly, -1.3 million is not the midpoint between 0 and -3.7, suggesting the budget office gave a bit more weight to studies finding less evidence of job-loss effects.

Thus spoke Zarathustra the CBO. Should this lead objective policy makers to embrace or eschew the policy to increase the federal minimum wage to $15 in 2025 (assume for this exercise that “objective policy makers” exist)?

I’d give a solid push towards embrace. It’s a progressive policy that’s long been shown to largely hit its goals of boosting the earnings of low-wage workers whose families seriously need the income. Yes, the report warns that some will be hurt by the increase, but the best research suggests their job-loss estimate may be too high. Moreover, even if they’re right, the ratio of helped-to-hurt is 21 (27.3m/1.3m). And given the extent of turnover in the low-wage labor market, many of those 1.3 million workers will eventually find new jobs, jobs which pay a lot better than their old ones.

Full disclosure: I’ve long advocated for minimum wage increases, so my “embrace” won’t surprise those who’ve followed that work. But the reason why I—and, more importantly, progressive institutions like the Economic Policy Institute, CBPP, CAP, and many others—have long advocated for minimum wage increases is that a deep body of uniquely high-quality research finds that prior increases have had their intended effects of raising low-wage workers’ incomes without leading to significant job loss.

But isn’t the $15 minimum wage a lot more ambitious than prior increases (the CBO report also simulates $10 and $12 increases)? It is, and as such, it will have a much larger “bite” than prior increases, meaning it will apply to a larger share of low-wage workers than past increases. Figure 4 in the report shows that the 1991 increase directly affected about 6 percent of workers; this one could affect almost 14 percent.

To evaluate this concern, go back to my comment about “uniquely high-quality research.” By that I mean that because so many states and cities have implemented higher wage floors on their own—there are over 130 such cases over the last few decades—researchers have been able to conduct many more experimental-type studies than in virtually any other area of economics, comparing outcomes in places that raised their wage floor to outcomes in places that did not. Moreover, some of these increases have had comparable bites to the $15 wage simulated by CBO, as shown by this new paper by Godoey and Reich.

The importance of this new report relative to today’s CBO release is that G&R focus especially on high-impact (large bite) increases. They find “positive wage effects but do not detect adverse effects on employment, weekly hours or annual weeks worked. We do not find negative employment effects among women, blacks and/or Hispanics. We do find substantial declines in household and child poverty.”

No single study will end this debate, but as someone who’s been in this debate for about 30 years, believe me: especially since the path-breaking work of the late (man, that’s still painful to write) Alan Krueger and David Card, the evidence from this sort of controlled study has changed many economists’ and policy makers’ views on minimum wages.

The simple, classical model—raise pay by mandate and everyone affected gets hurt—is clearly wrong, as the CBO report shows. Just how wrong is it is something we’ll continue to argue about. But in the meantime, policy makers who want to improve the living standards of low-wage workers, reduce poverty, and push back on inequality can rest assured that, as the budget office’s new report shows, the evidence is on their side. The benefits of the increase—even a significant increase like this one—far outweigh the costs.

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10 comments in reply to "More evidence–this time from CBO–that higher (even much higher) minimum wages largely do what they’re supposed to do."

  1. Kevin says:

    But such a minimum wage law would leave no price (wage) adjustment path to absorb immigration. We would be picking a point higher on the labor demand curve corresponding to fewer jobs. Immigration would tend to force us to a lower point on the labor demand curve implying more jobs, but lower wages. We’d be working at cross purposes.

    Unless we are assuming that people fleeing massive unemployment in their home country can magically create more jobs here (a belief system that is likely directly tied to the availability of legal pot), each additional immigrant worker would either go directly onto the unemployment line or displace a current worker out of employment.

    And don’t forget, one of the major political parties is openly advocating de facto opening the borders who hasn’t committed a violent penalty. Don’t know how you can reconcile the two.


    • Jared Bernstein says:

      I thought folks with these concerns liked high min wgs as they allegedly dampened employers demands for an increased supply of super-cheap labor. What’s the point if you’ve got to pay a relatively high min wg?


      • Nick Batzdorf says:

        ^ The rim is still shaking.

        As an aside, I have no problem paying something like $15 a year more – in fact I *want* to pay it – for the fruit I eat to lift a couple of million farmworkers above the poverty line. And $15 is not an exaggeration.


      • Kevin says:

        Jared,

        I’m sure that you know better. You must be just looking for arguments to control the crazies. But just ask. I’m willing to help.

        A minimum wage becomes unworkable if unemployment becomes too high. Matching wages and hours to enforce the minimum wages is a lot more complicated than matching SSNs. If we can’t enforce the immigration laws, we certainly can’t enforce more complicated minimum wage laws.

        Once you reduce the total number of jobs by 1.3 million and let in tens of millions of new immigrants, because you not only opened the borders but gave an unlimited offer of a $15/hr jobs and free medical care, unemployment will go well into the double digits (impossible to estimate how high). Employers will find no shortage of desperate workers willing to work for a fraction of $15 and those legally eligible for assistance will often be forced onto the dole. The cost of all the public assistance (not to mention the lack of housing, health care, and schools for 10s of millions of new residents) will quickly exhaust the public purse. Employers will have all the cheap workers they need and probably get away with paying less than they are now.

        Remember that far-right libertarians economists like Milton Friedman (not to mention the business lobby) always wanted open borders. Friedman explains here https://www.youtube.com/watch?v=3eyJIbSgdSE why open borders will destroy what he calls the “welfare state.” Open borders make it impossible to guarantee any minimum share of the pie. It’s a policy tool to enforce income inequality. Income inequality is not a bug of recent decades of lax immigration enforcement, it’s a feature.

        There was even a time not too long ago when Paul Krugman (who supports a social safety net) made the same point “..open immigration can’t coexist with a strong social safety net; if you’re going to assure health care and a decent income to everyone, you can’t make that offer global” in a blog entitled, “The Curious Politics of Immigration,” https://krugman.blogs.nytimes.com/2010/04/26/the-curious-politics-of-immigration/ until the Democratic Party came along and made him toe the Party Line.”


        • PF says:

          This reminds me of a panel on immigration at a NABE conference two years ago (I think). Jared and Fred Treyz gave factual presentations, with lots of charts and tables, about how immigration would improve GDP over time. And then someone from the Heritage Institution gets up and says, immigrants don’t vote Republican, it’s perfectly reasonable to keep them out.


          • Kevin says:

            I saw Fred Treyez speak too. Fred Treyez is a paid professional witness. He got the result that his clients wanted. But when asked how his results can circumvent the Supply and Demand model, he said that some research (no doubt Giovanni Peri – who claims that “imperfect substitutes are complements – a mathematical impossibility) agreed with him. But he would not say why he chose those models over Marshalian supply and demand. Those who write the checks write the conclusions – and the big money wants cheap labor.

            If you actually removed 6-7 million illegal workers from the U.S., The impact on wages might be as high as 5 times as great – but probably less. The reason being that most of those jobs are minimally productive and a lot of American workers would take them, particular at higher wages. Remember that until illegal strikebreakers were brought in, union meatpacking jobs paid a lot more (and probably were a lot safer). Caesar Chavez opposed illegal immigration – which was the Democratic position back then. Democrats still do oppose illegal immigration. But those things that live at the base of Chuck Schumer’s and AOC’s brain and will have to find new hosts if they die are working for the CoC (Chamber of Commerce). Those who write the checks write the conclusions. And the CoC has the biggest checks.


  2. Nick Batzdorf says:

    ^ The rim is still shaking from that.

    Relatedly, I *want* to pay $15/year more for the fruit I eat so hundreds of thousands of farm workers can be lifted above the poverty level.

    That’s not an exaggeration – it would literally cost a few pennies more for a tray of strawberries.


  3. Owen Paine says:

    The minimum wage
    Is part of a system of bottom up job income instruments

    Including also
    Earned income subsidies
    Full employment inducing
    spending increases
    tax cuts
    and federal pay outs
    Forex policy
    Tarrifs
    Immigration
    Etc etc

    No blow back from raising MW
    Can’t…cant be off set


  4. Eric377 says:

    What is the anticipated impact on wages of workers who command a skill/experience premium against current min wage but are below $15/hour? Min wage is $8 and worker A started there but moved up a couple times and is at $13 where plenty of employees are at/near min at the firm. Do models put them at $15 or think they retain some premium against min wage workers?


  5. Greg says:

    If raising the minimum wage to $15/hour is so beneficial, why not take on up to $20/hour? This is foolishness. No one needs to set a rate of pay – that should be between the employer and the employee. Somehow the fact is overlooked that no one is supposed to be living on entry level positions and pay. The jobs that have low pay are for starting out in the workforce, learning how to work and moving on up as you become more valuable to your employers.


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