Tuesday, February 25, 2014

Fred Thompson: The CBO Report and the Minimum Wage I

Fred Thompson checks in again with a two-part post on the minimum wage.  Part II will post tomorrow.


This Blog has, over time, paid a lot of attention to the minimum wage, arguably more attention than the issue deserves, given that the effects of changing it are small, mostly invisible or somewhat benign. Of course, as the owner of Oregon Economics, Patrick Emerson, observes, the issue is of special interest to Oregonians. The Pacific Northwest already has the highest state minimums in the land and Washington’s Governor Jay Inslee and Oregon’s Labor Commissioner Brad Avakian are calling for further increases. Then too, there’s the SeaTac initiative, which raised the minimum wage to $15 an hour for the airport’s hospitality and transportation workers, and Mayor Ed Murray's push to extend the $15 minimum to Seattle.

Ds often try to push the issue onto the national legislative agenda in midterm election years. President Obama kicked off this year’s campaign in his State of the Union message, when he called for “a fair wage of at least $10.10 an hour.” Minimum wages are popular with voters and many Ds and their constituents really want to see them increased. The looming election, with its focus on legislative races, greatly boosts the likelihood of enacting an increase. Besides, the minimum wage is an effective wedge issue, distinguishing Ds from Rs. Politically, this is a win-win issue for Ds.

Figure 1: US Minimum Wage History

Consequently, you can expect to hear plenty from both Ds and Rs about a report recently issued by the nonpartisan Congressional Budget Office (CBO). It found that a national minimum-wage hike would bump up earnings for 16.5 million people and cost 500,000 low-wage workers their jobs. In other words, a minimum-wage hike will help a lot of low-wage workers and hurt a few.

This is how the President’s Council of Economic Advisers (CEA) spins the report:

1. CBO finds that raising the minimum wage to $10.10 per hour would directly benefit 16.5 million workers.

2. CBO finds that raising the minimum wage would increase income for millions of middle-class families, on net, even after accounting for its estimates of job losses. Middle class families earning less than six times the poverty line (i.e., $150,000 for a family of four in 2016) would see an aggregate increase of $19 billion in additional wages, with more than 90 percent of that increase going to families earning less than three times the Federal poverty line (i.e., $75,000 for a family of four in 2016).

3. CBO finds that this wage increase would help the economy, injecting about $150 billion into the economy each year. (Note, this is not exactly what CBO said. The $150 million dollar figure comes from another study entirely, one which makes some pretty bizarre assumptions. What the CBO said is that raising the minimum wage will probably increase aggregate demand slightly “because the families that experience increases in income tend to raise their consumption more than the families that experience decreases in income tend to reduce their consumption” and only in the near term.)

4. CBO also found that raising the minimum wage would lift 900,000 people out of poverty and that only 12 percent of the workers likely to benefit from a minimum-wage increase are teenagers.

The CEA then goes on to pooh-pooh the CBO’s claims that a minimum-wage hike would probably cost about 500 thousand low-wage jobs, based primarily on a poll of eminent economists showing 80 percent of them think that boosting the minimum wage is a good idea. The CEA simply dismisses the evidence that minimum wage hikes increase welfare dependence or that less-educated single mothers are the folks most likely to be hurt by a minimum wage increase.

So, what does the CBO report actually say, aside from agreeing that a minimum-wage hike is on balance an OK idea? To answer that question I will show some simple analysis and a few numbers. (Note, I’m simplifying the CBO’s analysis a lot, by ignoring states with minimums higher than the national standard, lumping the folks earning more than their state’s current minimum wage but less than the proposed new minimum in with those now earning minimum wages, adjusting start and end points to produce approximately the same sums as the CBO, and assuming the supply of low-wage labor is fixed – doesn’t vary with the wage offered. The supply assumption is clearly counterfactual, but it makes for the strongest possible case for the minimum wage.) My take on the CBO report is depicted in Figure 2.

Figure 2: Effect of a Minimum-Wage Hike from $7.50 to $10

The CBO reports (I’ll get to how they got there in my next post) that the demand for low-wage labor is quite inelastic (doesn’t vary very much when the minimum wage goes up). This conclusion is reflected in Figure 2 by the line labeled ‘D,’ which shows that increasing the minimum wage by a third (from $7.50 to $10) reduces low wage employment by about 3 percent (from 17 million to 16.5 million). In this case, the net gain to low-wage-workers would be area labeled A less the area D, or 16.5 million*(2,000*$2.50) less .5 million (2000*$7.50), which is, $75 billion (here I’ve used 2,000 hours a year as an estimate of full-time work).

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