CBO finds increasing the minimum wage does not have a statistically significant impact on employment
That’s probably not the headline you were expecting if you’ve turned on the news in the last few days. The Congressional Budget Office (CBO) says raising the wage to $10.10 will cost 500,000 jobs! (We posted a full analysis of the CBO report yesterday). Thats certainly seems significant. But statistical significance is not a measure of magnitude, it’s a measure of certainty. How sure are we that we’ve got the correct number? In this case, the CBO is not very certain at all. In fact, by the standards normally used in social science research, they aren’t justified in rejecting the hypothesis that the minimum wage has no impact at all on employment.
But let’s back up a little to talk about how we can evaluate certainty. In most cases, when we test for statistical significance, we’re testing if our result is different from zero. The most intuitive way to test this is to look at a confidence interval. Social scientists usually report a 95% confidence interval, indicating a range that they would expect to observe 19 times out of 20 if we were enact a policy (in this case, raising the minimum wage). A wide confidence interval indicates a high range of uncertainty. If the confidence interval includes zero, then we say that result is not statistically significant. (1)
Now, based on the CBO’s own numbers, the confidence interval for the impact of raising the minimum wage on employment includes zero. So, why doesn’t the CBO report clearly say this? Well, instead of reporting the 95% confidence interval, they chose to report a 67% confidence interval. Now, I’ve never seen anyone report a 67% confidence interval. So I asked a few economists and an econometrician (someone who deals with advanced statistics in economics), and they’ve never seen a 67% confidence interval either. They only reason someone would choose such a low confidence interval is to make their result appear statistically significant.
Choosing a confidence interval after running the analysis in order report a significant result is a form of manipulating data. Chances are, even people who routinely deal with confidence intervals skipped the footnote in which the CBO noted that they were not reporting the standard 95% confidence interval, but instead a 67% confidence interval.
The CBO’s analysis showed, correctly, that they really have no idea what the impact of a minimum wage increase would be on employment. However, they then chose to report that analysis in a misleading fashion by intentionally choosing a confidence interval that allowed them to report a significant result. The correct thing to say would have been along the lines of, “we really have no idea, but we think there might be a slight negative impact.” Or, in slightly more technical terms, “we found a negative coefficient, but it wasn’t statistically significant.” It’s a shame the CBO didn’t choose to report the data in a more straightforward manner.
(1) I’m assuming that we’re testing for a statistically significant difference from zero. This is the most common, but one could also test if the result is significantly different from 1 or 2 or any value one cares to test. However, in the case of raising the minimum wage, the pressing question is if the employment impact is zero, or not.
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.
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:
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.
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.
In any debate about the minimum wage, inevitably someone will dig out their knowledge of economics 101 and argue that raising the minimum wage is self-defeating because increasing the price of labor will decrease the demand of labor, and so unemployment will rise. Like most econ 101 arguments, this rest on some terrible, horrible, no good, very bad assumptions.(1) For the sake of space, let’s just talk about two of them.
- The labor market works like other markets.
- Raising the minimum wage will not affect anything else in the economy. (Economists call this ceteris paribus, Latin for “other things equal.” Because we all know that if you say it in Latin it must be true.)
Let’s think about the labor market compared to other markets. If I were to ask you the ideal price of any normal good or service, like a new computer or a haircut, you would probably say free. After all, in our ideal world, all of our material needs are satisfied at zero or at least very little costs. But what about the price of labor? Almost certainly you would not want labor to be free, because labor, on a fundamental level, is not the same as a commodity. (Thank you to blogger Squarely Rooted for this general idea).
The labor market is also characterized by large information asymmetries and differences in bargaining power. Potential employees have less information than their employers, and tend to have fewer options. This inequality of bargaining power only gets worse when there is high unemployment. You don’t have to be a radical to think this is a problem, you can find an analysis of uneven bargaining power between workers and employers in capitalism’s foundational text, Adam Smith’s Wealth of Nations. This inequality is a driving force behind unions, labor market regulations and yes, the minimum wage. Any time one party to a contract has significantly more power than the other there is always the opportunity for exploitation. (Fun Fact: Urban Sinclair’s The Jungle was not primarily about unsanitary food, the focus was actually on the terrible working conditions of the people preparing the food. As one example, he wrote about someone falling in a meat grinder thinking that people might care that unsafe factories were killing people, but instead the audience just freaked out about the possibility of there being human in their food). If you do not believe that power differentials lead to exploitation, please spend some time reviewing the history of the industrial revolution. Labor market laws were a direct response to historical abuses of power.
Second, raising the minimum wage will inevitably impact other parts of the economy. The Economic Policy Institute has argued that by increasing the earnings of people who are likely to spend all their extra money we can boost aggregate demand and therefore help stimulate employment. John Schmitt at the Center for Economic and Policy Research suggests 11 theoretical reasons a minimum wage increase might not increase unemployment.
Fortunately, we don’t have to restrain ourselves to competing theories. The minimum wage has been empirically studied. A lot. So much that there are now many studies of studies (meta-studies) that try to see if there is a consensus about the minimum wage. John Schmitt has a review of those, but the most compelling way to see the results of the meta-studies is this graphic on teenage employment and the minimum wage.
The results are weighted by the accuracy of the estimate, with higher points being considered more accurate. So of the 1,492 estimates available, we see a clear convergence around zero. Now this is just teenage unemployment, but there’s widespread agreement that if the minimum wage has a dis-employment affect it will be strongest among teenagers. So if we can’t see it in looking at the data on teenagers, we won’t be able to see it with adults either. So at some point we may be justified in concluding that there just isn’t a strong effect of the minimum wage on employment.
Of course, if minimum wage doesn’t increase unemployment and does increase wages, we have a clear win for low-wage workers. One final note, although I criticized ‘econ 101’ logic at the beginning of this post, I’m not saying anything here that hasn’t been said by a lot of economists. In fact, a survey of leading economists found them ambivalent on the question of unemployment effects, but fairly decisively in favor of raising the minimum wage. Even among those economists who think there may be a small impact on employment, there’s largely agreement that the benefits of higher wages outweigh the modest effect on employment. Here are their responses asked if the benefits of raising the minimum wage to $9 an hour outweigh the costs:
So why do all these economists disagree with econ 101? Econ 101 makes assumptions in order to make things easier to understand as a starting point for learning about economics. Good economists understand that these are assumptions, look at empirical evidence, and then adjust by making increasingly realistic theoretical models. So next time someone says “It’s basic Econ 101” remember that’s not the end of the story. Economics only gets more complicated from there, so making policy decisions based on “simple supply and demand” is never a good idea.
(1) I realize this is redundant, but I want to (a) make a point about just how bad these assumptions are, and (b) make a reference to one of my favorite children’s books, “Alexander and the Terrible, Horrible, No Good, Very Bad Day”
The headline numbers from this mornings job report are +113,000 jobs and a slight decrease in unemployment from 6.7% to 6.6%. Unfortunately, +113,000 jobs is less than the +190,000 expected, and also isn’t enough to reduce unemployment. Usually this means unemployment went down because people stopped looking for work. However, that’s not the case this month, the civilian labor force rose by 499,000, which pushed the labor-force participation rate up, meaning more people started looking for work than stopped.
The simple truth is the numbers don’t match up. The 113,000 jobs comes from a survey of businesses, and the unemployment rate is generated by a survey of households. The household survey shows 616,000 new jobs as well as a large reduction in people who were stuck in part-time jobs but wanted to work full-time (-514,000). In other words, we have a wildly optimistic household survey and a mildly pessimistic establishment survey. So what does it mean?
Usually the household survey is noisier (i.e. the numbers bounce around more) than the establishment survey. Remember that all surveys have a margin of error, and both the household survey and the establishment survey usually get substantially revised after their initial release. As part of this report November was revised up from 241,000 to 274,000 and December had an unusually small revision moving from 74,000 to 75,000. My guess is that eventually we will find January is doing roughly what the economy has been doing for the past 3 years, generating about 190,000 jobs per month, which is approximately enough to get us to full employment in 2020 or so. In other words, the economy is still improving, but is unacceptably slow for the 10.2 million people who remain unemployed and the 3.6 million long-term unemployed.
The report did contain good news for the long-term unemployed, with long-term unemployment down 232,000 since last month and down 1.1 million since last January.
The percentage of unemployed who are long-term unemployed has followed a similar pattern:
We won’t know for a while how to really reconcile the household survey and the establishment (business) survey, but for now this looks like a continuation of slow job growth, but some rather encouraging news for the long-term unemployed. Long-term unemployment is particularly important both because of the high financial, social, and psychological costs of unemployment and because the longer an individual is unemployed the less likely they are to be able to find quality employment again. Pushing down long-term unemployment should be a top priority for policymakers and advocates.
President Obama laid out three policies to fight poverty in tonight’s State of the Union Address
- Fund Early Childhood Education
- Increase the Minimum Wage
- Expand the Earned Income Tax Credit
Here’s what he had to say about each one:
1. Early Childhood Education:
“Research shows that one of the best investments we can make in a child’s life is high-quality early education. Last year, I asked this Congress to help states make high-quality pre-K available to every four year-old. As a parent as well as a President, I repeat thatrequest tonight. But in the meantime, thirty states have raised pre-k funding on theirown. They know we can’t wait. So just as we worked with states to reform our schools,this year, we’ll invest in new partnerships with states and communities across the countryin a race to the top for our youngest children. And as Congress decides what it’s going to do, I’m going to pull together a coalition of elected officials, business leaders, and philanthropists willing to help more kids access the high-quality pre-K they need.”
2. Minimum Wage:
Americans overwhelmingly agree that no one who works full time should ever have to raise a family in poverty.In the year since I asked this Congress to raise the minimum wage, five states have passed laws to raise theirs. Many businesses have done it on their own. Nick Chute is here tonight with his boss, John Soranno. John’s an owner of Punch Pizza in Minneapolis, and Nick helps make the dough. Only now he makes more of it: John just gave his employees a raise, to ten bucks an hour – a decision that eased their financial stress and boosted their morale.
Tonight, I ask more of America’s business leaders to follow John’s lead and do what you can to raise your employees’ wages. To every mayor, governor, and state legislator in America, I say, you don’t have to wait for Congress to act; Americans will support you if you take this on. And as a chief executive, I intend to lead by example. Profitable corporations like Costco see higher wages as the smart way to boost productivity and reduce turnover. We should too. In the coming weeks, I will issue an Executive Order requiring federal contractors to pay their federally-funded employees a fair wage of at least $10.10 an hour – because if you cook our troops’ meals or wash their dishes, you shouldn’t have to live in poverty.
Of course, to reach millions more, Congress needs to get on board. Today, the federal minimum wage is worth about twenty percent less than it was when Ronald Reagan first stood here. Tom Harkin and George Miller have a bill to fix that by lifting the minimum wage to $10.10. This will help families. It will give businesses customers with more money to spend. It doesn’t involve any new bureaucratic program. So join the rest of the country. Say yes. Give America a raise.”
3. Earned Income Tax Credit:
“There are other steps we can take to help families make ends meet, and few are more effective at reducing inequality and helping families pull themselves up through hard work than the Earned Income Tax Credit. Right now, it helps about half of all parents atsome point. But I agree with Republicans like Senator Rubio that it doesn’t do enough for single workers who don’t have kids. So let’s work together to strengthen the credit,reward work, and help more Americans get ahead.”