CBO on the Proposed Minimum Wage Increase

February 18th, 2014 at 5:14 pm

So, the data munchers and crunchers at the CBO have been awfully busy in recent weeks, and now they’ve come out with a report on the impact of the proposal to increase the minimum wage to $10.10 from its current level of $7.25.

Here’s my rundown over at the NYT Economix blog, but let me expound on a few of those points here as well.

The big dustup will be over the budget office’s prediction that employment would be reduced by 500,000 jobs.  But 16.5 million low-wage workers benefit directly from the increase–they earn between the current and proposed new minimum of $10.10–and another 8 million will indirectly get a wage bump (that’s the spillover effect emanating from employers who raise the pay of workers slightly above the new minimum; see page 21).

It looks to me like CBO choose a pretty high-end estimate of job loss effects given the current state of the research.  But let’s say they’re right.  That means that 98% of those affected by the increase will be helped by it.

If you can find me another policy that lifts the wages of that many low-wage workers at no cost to the federal budget (again, according to CBO), let me know what it is…quickly!

Since the report came out a few hours ago, I’ve heard from a number of folks who think there should be no employment losses.  But as I read the long and varied literature on this, the research finds job loss effects ranging from small to zero.  Some very high quality studies find zero, some find small.  Some less reliable studies find large negatives or positives (see the figure in my NYT post).  CBO, for whatever reason, pulled a card [that’s a pun, for those steeped in this work] from the high-end of the deck to get their -500,000 employment impact.

But here’s the thing: even if they’re right–and even with their high card, they’re in the same universe–the result is the same one I’ve harped on forever in these parts: the beneficiaries far outweigh those displaced.

And think about this: when those displaced workers find their next job, they’ll earn more.

So, again, one can easily predict the ensuing news cycle and press releases from the opposition.  But this report confirms my priors: raising the federal minimum wage to $10.10 is a big winner for low- and moderate-income working families, at no cost to the federal budget.  And let’s face it, those families could really use a winner right about now.

 

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17 comments in reply to "CBO on the Proposed Minimum Wage Increase"

  1. Kevin Rica says:

    We could get a similar increase in wages with a DECREASE in unemployment by reducing immigration levels.

    How about imposing a $15/hr minimum wage for new immigrants? If they are not competing with native workers and previous immigrants, they can come and earn a much better wage.

    If they are competing with native workers and previous immigrants, the employers will find others to take the jobs and the immigrants won’t be allowed to come and take the jobs at low wages.


    • mitakeet says:

      I like that idea Kevin, but I would index it to the job the immigrant was taking. For instance, there is steady downward pressure on IT job rates because companies can buy (I mean hire) indenured servants (opps, I meant employees) from overseas and then keep them at the below-going-rate pay because the immigrant can’t leave. If, on the other hand, the company had to pay, for instance, median pay for the position, then suddenly those immigrants look a lot less appealing (as you suggest) and these same companies are much more likely to hire our new grads and give them the experience they need.


      • Kevin Rica says:

        mitiakeet,

        You are absolutely right of course! I was referring only to unskilled jobs. For jobs that require skills, employers should be required to prove that they have increased wages for the job by 10% annually for two years and then pay another 10% if they want immigrants.


  2. dog catcher says:

    Dr. Bernstein,

    I agree that the federal minimum waged should be raised, and you make a good case of the benefits heavily outweighing the (possible) downsides.

    Why is it, though, that an annual adjustment (similar to Social Security’s COLA) is not part of the discussion? Those of us who follow this issue know that not only is the minimum wage low, its infrequent increases have failed to keep up with inflation. We all know that the current federal minimum wage of $7.25 has less consumer purchasing power than the $3.35 minimum wage of the 1980s.

    I’m in favor of raising the minimum wage, but while we’re at it, let’s ensure that the minimum wage’s purchasing power is maintained with a mandated annual adjustment.


  3. Robert Buttons says:

    Samoa and Puerto Rico are good examples of the negative effects of artificially fixing wages above market rate.


    • urban legend says:

      That was very helpful, Robert, considering all the explanation and sourcing you provided.


      • Robert Buttons says:

        As an example, with the original 1938 imposition of the minimum wage, the lower-income U.S. territory of Puerto Rico was severely affected. An estimated 120,000 workers in Puerto Rico lost their jobs within the first year of implementation of the new 25-cent minimum wage, and the island’s unemployment rate soared to nearly 50 percent.

        Similar damaging effects were observed on American Samoa from minimum wage increases imposed between 2007 and 2009. Indeed, the effects were so pronounced on the island’s economy that President Obama signed into law a bill postponing the minimum wage increases scheduled for 2010 and 2011. Concern over the scheduled 2012 increase of $0.50, compelled Governor Togiola Tulafono to testify before Congress: “We are watching our economy burn down. We know what to do to stop it. We need to bring the aggressive wage costs decreed by the Federal Government under control… Our job market is being torched. Our businesses are being depressed. Our hope for growth has been driven away.”

        –Wilson, M. “The Negative effects of minimum wage laws” 2012


        • spencer says:

          You are aware that there was a massive recession in 1938.

          The data of job loses you quote would be massively impacted by the recession.

          Can you provide an explanation of how many of the job loses you cite were due to the recession and how many were due to the minimum wage hike?


          • Robert Buttons says:

            No minimum wage study I’m aware of competently disaggregates the overall macro picture from MW effects on employment. But just the qualitative evidence from Samoa is pretty convincing.


  4. purple says:

    Just imagine, we could have full employment if everyone was an intern !


  5. urban legend says:

    What is the time frame in which these estimated effects are supposed to be happening? At some point not long after it happens, any negative shock to businesses should dissipate, while the added income among those with a huge propensity to spend, and, therefore, the increase in consumer demand, is permanent.

    What always seems to be missing in these fearful predictions is recognition that because the increase applies to everyone, businesses within an industry generally will not experience a competitive disadvantage. The change should, at minimum, produce no reduction in demand, so for starters at least the same amount of work will need to be performed. Yes, some employers will seek ways to make do with fewer workers, but is that offset by lower costs associated with high turnover, better morale and productivity, and what should be an actual increase in demand from the higher incomes? Note also that those higher incomes are more likely to be spent locally, not on European vacations or Caribbean condos — not only is there a higher marginal propensity to spend in the lower income brackets, but it’s also spending that should have a higher multiplier because it will mostly be spent in the U.S.

    Sure looks like a good trade-off to me, and maybe that’s why the history of national increases provides barely more than zero support for the opponents. The Econ 101 explanation always looks incredibly unsophisticated.


  6. Dave says:

    This looks like a very flawed study by the CBO. Given that we are in a liquidity trap, and none of the data points occurred in a liquidity trap, it is invalid.

    My quick calculation ballparks the creation of 1-2 million new jobs as a result because we’re in a liquidity trap.


  7. save_the_rustbelt says:

    Democrats love the CBO until the CBO messes with their plans, then no love.

    Writing from the heartland, someone should be made to understand that many small businesses are still effectively in the recession, and even some large businesses (McDonalds) are performing subpar.

    I’m all for an increase, if we don’t do too much damage.


    • Dave says:

      “Democrats love the CBO until the CBO messes with their plans, then no love.”

      I’m not sure who “Democrats” are and this is an overly broad characterization that depends upon the idea that the CBO is either a great source of information or a bad source of information. Could it be that sometimes it is right and sometimes it is wrong?

      I would restate this to say that almost all politicians like sources of information that back up their claims and they don’t like those same sources when they don’t. However, people that are interested in the truth need to go way beyond characterizing results by the source of information.

      A sound analysis doesn’t depend upon the source. If it is sound it is sound. If it isn’t, it isn’t.


  8. Pablo says:

    CBO: “many low-income workers are not members of low-income families.” That includes teenagers and second earners. CBO estimates a net $5 billion benefit to families with incomes below the poverty line, which is good for those who will keep a job but not so good for those who will lose it.

    “Once the increases and decreases in income for all workers are taken into account, overall real income would rise by $2 billion,” says the CBO study. That’s out of an economy of $16 trillion.


  9. george kaplan says:

    CBO should also consider the effect of additional funds to be spent. If net increase is $2/hr or say $3,000 per 1500 hour/year worker Times 15mi;;ion low wage workers, then 45 Billions is added to the economy. This surely will lead to many additional jobs.

    Let the CBO do this type of study also.


  10. Becky W says:

    You say this program assists low and middle income people “at no cost” to the federal government. Did CBO analyze the impact on the federal budget? I would expect positive effects of reduced safety net expenses and higher tax revenues. I consider big business employers of minimum wage workers to be “takers” whose profits depend on government subsidies that help support their work force.


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