What does the CBO report actually tell us about increasing the minimum wage?

Yesterday’s Congressional Budget Office (CBO) report on the impact of raising the minimum wage has been all over the news today. The headlines from the report (16.5 million workers with increased wages, 500,000 jobs lost, and 900,000 people lifted out of poverty) come as mixed news for both sides of the debate. It’s worth taking a little bit of time to dig into the report and its likely impact on minimum wage legislation.

First, let’s talk about why the CBO report matters. Reports on the minimum wage are a dime a dozen, and anyone with an internet connection can quickly conjure up a study that tells them whatever they want to hear.  The CBO is the closest thing there is to a referee within policy circles. Although it is occasionally challenged, it is generally respected as a source of good, impartial analysis.

In this report, the CBO analyzes the impacts of raising the minimum wage to $10.10 and of raising it to $9.00. Because the current push is to raise the wage to $10.10 I will only be talking about that part of the report. Let’s start with the headline numbers presented in Table 1.

CBO min wage table 1

First, we have the estimated job losses, 500,000. As the CBO notes, this is highly uncertain. There is a 67% chance that job losses will be between 0 and 1,000,000. That leaves a 33% change, which is not insignificant, that the minimum wage could have an even stronger effect in either  direction. In other words, the CBO is really not sure how many jobs it costs, to the extent that there’s a 17% chance the impact is actually positive! Their estimate is based on empirical studies of the employment impacts on teenagers, and then an attempt to place those studies in the context of other studies on adults. There are decent reasons to think that their resulting estimate is too high. (See, in particular, this review of empirical studies on the minimum wage from the Center for Economic and Policy Research).  The easiest summary to see is this visual one provided by Jared Bernstien in the NY Times this morning, which shows a very clear clustering around no impact on employment:

min wage funnel graph

That was the bad news from the minimum wage report. The rest is highly positive. Raising the wage would:

  • Increase wages for 16.5 billion people.
  • Lift 900,000 people out of poverty
  • Of the people impacted, only 12% are teenagers and over half are full-time workers.
  • Increase overall incomes by $2 billion.

For some reason, the myth that the minimum wage mainly benefits part-time teenage workers never dies, despite clear evidence that most people impacted by the wage increase are over 20. Hopefully the CBO report can put that myth to rest even as it rekindles debate over the employment impacts.

The benefits of the minimum wage are not evenly spread. Figure 3 shows the impact on income groups classified based on their distance from the poverty line.

CBO min wage fig 3

It suddenly becomes very clear that a minimum wage increase is good news for most people making less than 6 times the poverty line.

Suppose, for the sake of argument, we accept the CBO’s analysis that the minimum wage will lead to job loss for 500,000 workers. It also helps 16.5 million workers directly (and others indirectly, but since CBO does not attempt to quantify those workers we’ll ignore them for now). That leaves us with a policy that helps 97% of low-wage workers. If we could distribute gains evenly, this would be the equivalent of taking a 3% cut in pay in exchange for a 39% increase in hourly wages. (1) That’s a really good deal, and that’s why, in aggregate, an increase in the minimum wage increases earnings for low-income families and lifts 900,000 families over the poverty line.

If someone offered me a 3% reduction in my hours and a 39% increase in my hourly wages I’d jump at the chance to take that deal. Now, unfortunately, businesses are likely to cut people instead of cutting hours. I think the CBO has overstated the potential employment losses, but supposing they have it right, we’re still looking at a policy with an undeniable upside. It’s not only quantity of jobs that counts, it’s quality as well.

(1) The 3% cut is the cut in hours moving from 17 to 16.5 million jobs. The 39% increase is the increase in the minimum wage from $7.25 to $10.10.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: