The Minimum Wage Increase and the CBO’s Job Loss Estimate

February 23rd, 2014 at 9:40 pm

Let’s look at bit more at the CBO’s job loss estimate of 500,000 from their minimum wage report out last week (I’m focusing largely on their analysis of the increase to $10.10, then indexed to inflation).

My point last week was that even if the budget office is right about this employment loss guesstimate, we’re still talking about a policy that lifts the pay of 24.5 million low-wage workers (16.5 million directly, 8 million indirectly), meaning 98% of the target audience reap the benefit of the policy.

This post is about whether their employment loss estimate is defensible.  To telegraph the result: yes, but it’s from the upper end of the range, and that’s an unfortunate choice given the political intensity around this issue.  Just a few years ago, the budget office was careful not to weigh in on this question, pointing out that the range of estimates was wide.  If anything, the range has widened since then, making their current choice even more puzzling.

Recall that the CBO did not do original research on the impact of higher minimum wages on employment.  They just went into their “demand elasticity supply closet” and took a number that many of us who follow this work thought was from a pretty high shelf.

That number was -0.1 in the case of teenage workers for the $10.10 increase, implying a 10% increase in the minimum wage would lead to a 1% loss of jobs held by teenagers.  The CBO suggests—though it’s not clear how they landed on this number—that they took the midpoint between a range of estimates.

Two problems here.  First, I’m pretty sure that’s not the midpoint.  Summarizing a vast literature (more on that exercise in a moment), the CBO says that the midpoint lies between zero and -.15, or -0.075 (there are credible estimates of positive impacts of minimum wage increases on jobs, but let’s stick with their range).

The CBO did choose this lower midpoint for their simulations of a $9 minimum wage, but kicked it up to -0.1 for the $10.10 version.  They offer a number of rationales for this, and while they’re not unreasonable (e.g., unlike the $9.00 simulated policy, the $10.10 increase is indexed to inflation), they’re really just hunches and given the sensitivity of the estimate, why apply hunches?  And why do all their hunches just go in one direction (toward larger job losses)?

Second, as economist Michael Reich points out in a recent piece on the current state of research on this question of the minimum wage and job loss, if the budget office had weighted the various estimates by the quality of the studies, they would have given a heavier weight to those which find no significant impact on employment.  Reich discusses the methodological advances that the CBO discounted, generating results like those summarized here in Table 2 from testimony by Arin Dube, a co-author of Reich’s on various careful analyses of this question.

Had they done so, they might well have landed on a smaller negative, like -0.05, which would have cut their projected job loss by half, to 250,000.  In fact, the most accurate assessment would have been something like a range from zero to 500K, with an acknowledgement that zero is a plausible outcome supported by high-quality work (this was the White House’s position in their critique of the CBO report), as is a negative number in the low hundreds of thousands.

In fact, one part of this that I found puzzling was the fact that in a 2007 CBO analysis of a minimum wage increase, the budget office said this about job losses:

For this tabulation, CBO assumed that no changes in employment or hours would have resulted from the higher minimum wage rate [1].

And here’s the footnote:

[1] The economics literature includes numerous studies on the employment effects of increases in the minimum wage, which indicate a wide range of potential impacts.

So, here’s the question: since 2007, have econometricians learned that much more now about this question that we can now make an accurate assessment when we couldn’t do so, at least in CBOs judgment, back then?

I don’t see it.  If anything, the research since 2007 has widened the range—e.g., it now includes zero (and remember, we’re talking just about teenagers here; even the early research wasn’t sure if older workers’ employment was affected at all by moderate increases).

I suspect the core of the problem is that most economists simply haven’t digested the newer work.  Though CBO cites it, they don’t give it heavier weight, as Reich argues they should.

I predict that this will change in the next few years in no small part due to a book about to be released by Dale Belman and Paul Wolfson: The New Minimum Wage Research, an extremely detailed analysis and review of the best work over the past few decades.  I’m just looking at a pre-publication manuscript, and man, if you go for that sort of thing, it’s a real page-turner.

A key chapter provides a meta-analysis of the many studies they review, wherein they summarize hundreds of estimates, carefully accounting for quality, without, as far as I could tell, an ideological thumb on the scale.  In fact, about two-thirds of the employment elasticities in the chapter are negative, and a fair number are statistically significant.  But after what has to be the most exhaustive existing analysis of the question of the impact of minimum wage increases on employment, here’s what Belman and Wolfson conclude:

Bearing in mind that the estimates for the United States reflect a historic experi­ence of moderate increases in the minimum wage, it appears that if negative effects on employment are present, they are too small to be statistically detectable. Such effects would be too modest to have mean­ingful consequences in the dynamically changing labor markets of the United States.

This begs the question as to why moderate increases in the price of low-wage labor do not consistently generate “statistically detectable” effects, and I’ll get into that some other time (Reich does a bit in the link above and I’ve done so here as well).  The point for now is that CBO clearly highballed the job loss estimate.  They’re not “wrong” but in an organization that strives for balance, this is not their most balanced work.  And given the importance of the issue and the divisiveness of the politics, that’s just very unfortunate.

UPDATES: First, Paul Wolfson himself reminds me that an earlier meta-analysis by Stanley and Doucouliagos of employment elasticities from minimum wage research lands in a similar place: “with 64 studies containing approximately 1,500 estimates, we have reason to believe that if there is some adverse employment effect from minimum-wage raises, it must be of a small and policy irrelevant magnitude.”

Also, I stumbled on this excellent discussion of many of the above points by John Schmitt, one of the premiere synthesizers of minimum wage research.

Next: why did the CBO deflate the minimum wage with the PCE deflator? (I know, you can’t hardly wait!)

Print Friendly, PDF & Email

11 comments in reply to "The Minimum Wage Increase and the CBO’s Job Loss Estimate"

  1. Kevin Rica says:

    Remember Jared,

    These low inelasticities of labor demand indicate that minimum wage laws do less damage — but they indicate that low-skilled immigration does the most damage. They indicate that the U.S. labor market would need huge wage cuts to absorb immigrants — or, if wage reductions are constrained by minimum wage laws, each immigrant will cause a one-for-one increase in unemployment.

    The position of the people pushing minimum wage laws is completely inconsistent with their position pushing no-immigrant-left-behind immigration “reform.” Their position is less inconsistent than hypocritical.

    • Jared Bernstein says:

      In the simple, static model, with inelastic demand, a supply increase lowers the wage a lot but doesn’t affect employment much (it increases slightly unless the demand curve is totally inelastic/vertical).

      • Kevin Rica says:

        In those simple, static models, once you apply an effective minimum-wage law, employment is fixed and every increase in the labor supply causes a one-for-one increase in unemployment.

        Unemployment indicates you have all the unskilled labor that you are going to use — no need for more.

        Open-borders advocates always claim that the labor market elasticities are high (curves are flat) so that all immigrants can be absorbed at a minimal change in wages (or if the labor supply curve is flat – forcing existing workers out of the labor force — sounds like what has been happening). That labor demand curve is the mutually-exclusive and diametric opposite of the case for a minimum wage law. Imposing a minimum-wage when the curves are flat would cause massive unemployment.

        People need to pick a story and stick with it.

        BTW: Creating a third “dynamic story” that people fleeing massive unemployment in their own countries “magically” create jobs here (unicorn farmers?) isn’t credible and obviously hasn’t happened (show me the unicorn farms). However, it does provide amusing opportunities for sarcasm.

  2. Mitchell Freedman says:

    I have known business people who have minimum wage workers. Not one has ever fired someone because of a minimum wage increase. Have they decided not to hire a new worker after a minimum wage increase? That is harder to say, but they tend to look at other factors, starting with demand for the good or service being produced, not the marginal increase in the minimum wage.

    I call this the conservative’s style of argument for a liberal position. Still, do any of the economists who write about how the minimum wage increases at the margin cause unemployment even do that? All I ever read is theory.

  3. george kaplan says:

    The $2 increase for so many (up to 40 million) must also have affect on adding jobs to service the increase in spending. The CBO should address this also.

  4. Perplexed says:

    Jared, since you’ve obviously analyzed the CBO report and these studies in some depth, can you tell those of us that haven’t if the models used include measurements of the effects of the increased spending by those workers who would have considerably increased incomes as a result of a minimum wage increase (and would likely spend close to 100% of that increased income) on demand and employment elsewhere? While the impact might be small,certainly a substantial amount of the spending for low-wage services comes from those with a relatively low marginal propensity to consume so it could be a factor. Since we’re including estimates that themselves include 0, the impacts probably shouldn’t just be ignored and assumed to be 0 with at least some attempt to estimate and account for it.Has any attempt been made to do so in these studies?

    • Larry Signor says:

      Just a back of the envelope model would indicate that a minimum wage hike, even with the attendant employment changes, would be stimulative. An oft ignored consequence of a minimum wage hike is increased government revenues. These revenues could help reinvigorate a social safety net with too many holes. Also stimulative. A minimum wage increase could be a real game changer for the economy, with a bump from the EITC.

  5. Jim DuPlessis says:

    I started using the Current Employment and Wages (CEW) series about 25 years ago as a business reporter. There was an economist at BLS who was extremely helpful — I think his name was Bernard Bell. Good folks. The stats were very useful because you could tell a story with them. You could write about textile workers in Greenwood County in the wake of the closing of the mills at Ware Shoals in 1980. You could answer questions. How many jobs were lost in that industry? What types of jobs increased and what did they pay? And, you could call bs on public officials. About 10 years ago, South Carolina officials starting talking about the state’s “growing automotive cluster.” Problem was, it wasn’t. It was stagnant. South Carolina was not immune to the outsourcing that was decimating the Midwest suppliers, just as it ultimately did not escape the competition that shifted production of textiles from New England to the Piedmont in the first half of the 20th century. Without the QCEW stats it would have been difficult to tell that story, or many others like it. So maybe $20 million is just the cost of message control.

    • Perplexed says:

      -“The stats were very useful because you could tell a story with them.”

      With the “news” media largely purchased and converted to entertainment shows, most of these stories are relegated to the periphery anyway, but making the facts from credible sources harder to come by further raises the costs of trying to credibly tell these stories to begin with. Facts and propaganda mix a lot like oil & water do.

  6. PJR says:

    The REAL minimum wage has been cut in most years since 1968, isn’t that correct? What have been the effects of real minimum wage cuts? Just from a methodological standpoint, the question should be “what are the effects of changing the real minimum wage” rather than “what are the effects of raising the nominal minimum wage.”

  7. Arnie Schultz says:

    Dear Dr. Jared Bernstein, It’d be nice if us inventors had a minimum wage, or anything at all. But I guess we’re players in that giant casino called Wall Street and take our lumps. Karl Marx called inventors “pioneers” and “trailblazers” and that they were the real revolutionaries who would bring progress to Western civilization. It was Nixon who raised capital gains tax to almost 50%, from JFK’s 20%. Reagan got it down to 28%, and that’s the administration’s goal now. I think some $200 billion goes from Wall Street to inventors at the present time, but Nixon almost brought that number down to zero. It was a Nobel economist during Carter’s tenure who got the Congress to do something about the near catastrophic situation in innovation, with only about 200 projects surviving. But Blumenthal was opposed to those efforts, as he was an ex-CEO who only favored in-house inventors, not some outside madman who was going to wipe out his factory with some “disruptive” new technology (a lot of workers worry about seeing a pink slip in their pay envelope saying the factory is closing because of some unregulated competitor with a better way of doing things). My linguistic project at the back counter of Bridgeman’s a couple blocks away from Folwell Hall (and the English dep’t) at the U of M managed to survive on $700 thousand from Wall Street over several decades (my friend Perry, who was George McGovern’s political campaign manager in 1972, told me that money from Wall Street was “on the come” as you didn’t have to pay it back). In Europe, inventors–if there are any–have to look to banks for financing. By the way, IBM has a paper up on the Internet dealing with my linguistic project entitled “Introducing Syntactica” (and also about me). Nobody yet has been able to explain a noun, verb, pronoun, etc., to a computer .