Fred Thompson checks in again with a two-part post on the minimum wage. Part II will post tomorrow.
THE CBO
REPORT AND THE MINIMUM WAGE I
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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