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Wednesday, February 19, 2014

The CBO Whiffs on the Minimum Wage

The Congressional Budget Office has just issued a report on the minimum wage that is a real head-scratcher. Analyzing proposals to raise the minimum wage to $9.00 or $10.10 per hour, it concludes in the latter case that there would be 500,000 fewer jobs in the second half of 2016 than there would be under current law (100,000 fewer for $9.00/hr.).

Predictably, conservatives have seized on this number as proof that the minimum wage is a "job killer." Even liberal media, such as Talking Points Memo in this paragraph's link, seem to think that number is a big problem, going on to say, "It's not all bad, though, for one of the centerpieces of Democrats' middle-class agenda ahead of the November congressional elections," as if the CBO report were mostly bad news for Democrats.

There are two problems with these claims. First, the CBO's calculations undervalue the best research on the minimum wage. Second, even in the CBO's estimated world, low wage workers are much better off as a whole than under the current $7.25/hr. minimum wage.

As I've discussed before, a relatively crude cross-national comparison of rich countries' minimum wages and unemployment rates does nothing to suggest any job-killing is going on. But the CBO's estimation procedure has serious flaws. It begins (p. 6) with what it calls "conventional economic analysis," which is already a big mistake. Simple Econ 101 reasoning (when the price of something goes up, the quantity purchased goes down) has had only sketchy empirical support, something that has been especially clear from meta-analysis of minimum wage studies (ungated version of Doucouliagos and Stanley 2009 here).

The CBO, of course, has heard of these studies, but it remains with a non-transparent explanation of how it weighted different studies (p. 22), saying it gave the most weight to contiguous state comparison studies. The only thing is, according to Arindajit Dube, these are the studies least likely to find a negative employment effect. Thus, how CBO ends up with a baseline of job loss remains mystifying.

Okay, so 500,000 fewer jobs isn't entirely plausible then, but what if we accept for the moment that it is? As Jared Bernstein and Dean Baker point out, there are still far more winners (16.5 million direct, another 8 million indirect--the latter being workers just above $10.10 who would probably see raises) than losers (0.5 million among low-wage workers; the rest are people with high incomes) in this scenario. And as Baker emphasizes, "...we are not going to see 500,000 designated losers who are permanently unemployed as a result of this policy." Instead, what will happen is people will work 2% fewer hours at an hourly rate that is 39.3% higher.

The math is simple: 0.98 X 1.393 = 1.365. In other words, low-wage workers will see their income increase, on average 36.5%. And this is the worst-case scenario!

I've said it before, and I'll say it again: the minimum wage is a winner both economically and politically.

Cross-posted at Angry Bear.


  1. So why don't we just raise the minimum wage to $25/hr., and lift everyone out of poverty? Every full-time employee would be making $50k per year.

    Because it will not work, and everyone knows it. The job losses would be tremendous. We still have not recovered from the job losses from the last increase in the Minimum Wage.

    Are people too stupid to negotiate a fair price for their work?

    1. You can't think of anything better than that tired argument? I bet you wouldn't take 100 aspirin for a headache.

      It is hard to negotiate your wage when you will starve without it and your employer won't. This is such a tremendous bargaining disparity that Adam Smith wrote about it in The Wealth of Nations.

    2. The wage is not going to be $25/hr,just $10.10/hr. We'll get there eventually. Kenneth is right.

    3. Your argument is that it is OK to put some people out of work, so that others benefit from their unemployment.

      There is simply no economic reason for increasing the minimum wage, and plenty of reasons not to.

      There are many employers one can go to if one offers you too little.

  2. Tell that to the unemployed and under-employed.

    1. Once again, numerous countries have higher minimum wages than we do, and lower unemployment. What we have that causing so much unemployment is austerity since 2010. See Paul Krugman:

  3. CBO numbers are obviously flawed. They estimate 500,000 jobs lost, but $2B more net income (including losses to business that have to pay the higher wages and including the inflationary effects).

    So HOW is that additional $2B of goods and services to be produced with 500,000 fewer jobs?

    1. Money gets shifted to lower-income people with a higher marginal propensity to consume. Demand goes up as a result. Here is a good source:

    2. If you don't believe the $2 billion number, why do you believe the 500,000 job loss number?