Assessing Those CBO Numbers on the Minimum Wage
This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org
This article is from the
March/April 2014 issue.
at a 30% discount.
Many supporters of an increase in the minimum wage viewed projections of job loss in the recent report from the Congressional Budget Office (CBO) as a serious setback. CBO put their best guess of the jobs impact of a higher minimum wage as a minus 500,000. This provided fuel for the claim of the minimum wage as yet another “job killer,” along with the Affordable Care Act, Dodd-Frank, and Michelle Obama’s push for school kids to exercise and eat healthy. A more serious assessment shows otherwise.
First, is worth noting the rest of the CBO analysis. CBO agreed with proponents of a higher minimum wage that the overwhelming majority of people benefiting would be adults, not high school kids earning spending money after school. It concludes that just 12% would be teenagers.
In addition, the benefits of a higher minimum wage go overwhelmingly to people who badly need extra income. CBO calculated that 60% of the benefits would go to households with earnings of less than three times the poverty level. The assessment also showed that a higher minimum wage would lift almost one million people above the poverty line.
These are very important takeaways from the CBO analysis, but there is no doubt that the job-loss projection is still front and center. In this respect, it is important to note that CBO did not do any original analysis. In other words, CBO did not attempt to do a new study to determine the effect on employment of raising the minimum wage to $10.10 an hour. Rather they came up with a number based on the existing research on the topic.
Here they essentially took the midpoint. There have been a number of solid studies done in recent years finding no job loss. CBO itself did not rule out this possibility. However, there have also been studies, most notably by David Neumark and William Wascher, finding that the minimum wage does cost jobs. In this case, it appears that CBO picked a number between the findings of these two sets of studies in putting out 500,000 as their best guess for a job loss figure.
At first blush, the prospect of losing 500,000 jobs sounds pretty bad, but that is not quite what this number implies. While there will undoubtedly be some employers that lay off workers or go out of business because of this minimum wage hike, that is not likely to be the way most of this adjustment would take place.
In the vast majority of cases, the reduction in jobs will occur because employers don’t hire a replacement for a worker who leaves, or are somewhat more cautious in hiring new workers in response to an uptick in demand. This can lead to 500,000 fewer jobs when the impact is fully felt, but it doesn’t mean that 500,000 people are thrown out of work.
Furthermore, these jobs tend to be high turnover jobs. (A higher minimum wage will reduce the rate of turnover, but these jobs will still have higher turnover than higher-paying positions.) As a practical matter, having 500,000 fewer jobs means that it will take people somewhat longer to find a job either when they first enter the labor force or after they leave another job. This means that people will work less on average.
We can take CBO’s numbers to get a ballpark estimate of this effect. It calculated that 16 million workers will be directly affected by the rise in the minimum wage. This makes the 500,000 projection of job loss a bit more than 3% of the affected workforce. On the other hand, raising the minimum wage to $10.10 implies an increase in the minimum wage of more than 39.3%. Assuming that the average beneficiary sees an increase half this size (for example if their pay was already $9.00 an hour), then the average increase in hourly pay would be 18.7%. This means if we accept the CBO projections, workers will put in roughly 3% fewer hours on average, but take home 18.7% in each hour they work, for a net gain for more than 15%. That doesn’t sound like much to complain about.