12:00 am
February 18, 2014
Today’s minimum wage report from the Congressional Budget Office recasts the national minimum wage debate. Though couched in the carefully nuanced phrasing of the famously staid nonpartisan research office, it makes clear that hiking the minimum wage has employment consequences, contrary to the claims of proponents. The 40-page report, half of it a methodological appendix, examines the effects of raising the federal minimum wage from $7.25 to $9.00 and to $10.10, the latter the number endorsed by the president and Congressional Democrats.
This will be a topic of much discussion. Below, I’ll excerpt from the report, with minimal commentary. (Note: although they give specific estimates, the CBO acknowledges a range of potential effects.)
On the employment and income effects of bumping the wage to $10.10.
Once fully implemented in the second half of 2016, the $10.10 option would reduce total employment by about 500,000 workers, or 0.3 percent, CBO projects.
…Many more low-wage workers would see an increase in their earnings…
The increased earnings for low-wage workers resulting from the higher minimum wage would total $31 billion, by CBO’s estimate. However, those earnings would not go only to low-income families, because many low-wage workers are not members of low-income families. Just 19 percent of the $31 billion would accrue to families with earnings below the poverty threshold, whereas 29 percent would accrue to families earning more than three times the poverty threshold, CBO estimates.
Explaining the employment effect.
According to conventional economic analysis, increasing the minimum wage reduces employment in two ways. First, higher wages increase the cost to employers of pro- ducing goods and services. The employers pass some of those increased costs on to consumers in the form of higher prices, and those higher prices, in turn, lead the consumers to purchase fewer of the goods and services. The employers consequently produce fewer goods and services, so they hire fewer workers. That is known as a scale effect, and it reduces employment among both low-wage workers and higher-wage workers.
Second, a minimum-wage increase raises the cost of low- wage workers relative to other inputs that employers use to produce goods and services, such as machines, technology, and more productive higher-wage workers. Some employers respond by reducing their use of low-wage workers and shifting toward those other inputs. That is known as a substitution effect, and it reduces employment among low-wage workers but increases it among higher-wage workers.
The specifically acknowledge that in some cases the conventional analysis might not apply. Then, in a comment that explains why we should not rush to judgment with respect to SeaTac’s Prop. 1, they observe:
At first, when the minimum wage rises, some firms employ fewer low-wage workers, while other firms do not; the reduced employment is concentrated in businesses and industries where higher prices result in larger reductions in demand. Over a longer time frame, however, more firms replace low-wage workers with inputs that are relatively less expensive, such as more productive higher-wage workers. Thus, the percentage reduction in employment of low-wage workers is gener- ally greater in the long term than in the short term…
It’s an extensive, thorough and objective analysis of an issue that lends itself too easily to emotional argument. Already, there’s been a lot of media attention. Here’s the Washington Post, the New York Times, Power Line, and Jared Bernstein.
The president’s Council of Economic Advisers has its response here. They observe, incorrectly and a bit defensively, that…
CBO’s estimates of the impact of raising the minimum wage on employment does not reflect the current consensus view of economists.
A review of the CBO references shows that CBO was well aware of the current economic literature, which – contrary to the CEA assertion – predominately finds minimum wage increases are associated with job loss.
As you would expect, critics focus on the job loss and proponents concentrate on the income gains for those still employed. When unemployment is our number one problem, I’d think we’d seriously rethink any policy that reduces employment and job creation. And remember, this analysis applies to a proposed federal hike to a level not much above Washington’s current highest-in-the-nation state minimum wage.
Much more on this all year long…
Tags: CBO , job creation , minimum wage