Policy: Budgets & Deficits

CBO: $10.10 minimum wage would lower employment by 500k, raise incomes for 16.5 million

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Raising the minimum wage to $10.10 by 2016 would increase wages for 16.5 million workers but lead to a loss of about 500,000 jobs, according to an estimate from the Congressional Budget Office released Tuesday afternoon.

The potential job losses projected by the CBO ranged from a "slight decrease" in employment to as many as 1 million.

The CBO examined the effects of a minimum wage increase similar to that advocated by congressional Democrats and the Obama administration, one that would raise the legal minimum hourly wage and index the rate to inflation so its value would not erode over time.

That measure would lift 900,000 American families above the poverty line, the CBO projected, raising their total incomes by an aggregate $5 billion. In aggregate, the hike would raise earnings for low-income workers by $31 billion.

But only 19 percent of those gains would accrue to families below the poverty line. Nearly a third would flow to families with incomes more than three times the poverty threshold.

For families earning more than six times the poverty line – roughly $120,000 a year for a family of three in 2016, according to the CBO – the result would be a net hit to income, as those families would lose more in business income than they would gain back from a family member seeing a raise thanks to the minimum wage increase.

Netting out those losses, overall real income would rise by $2 billion.

The report also examined the possibility of an increase in the federal minimum wage, currently set at $7.25 an hour, to $9. That is the rate that President Obama initially favored in his 2013 State of the Union address before signaling support for legislation introduced by Sen. Tom Harkin, D-Iowa, and Rep. George Miller, D-Calif., that included the $10.10 rate and an inflation peg.

Raising the minimum wage to $9 by 2016 would cause job losses of about 100,000, raise around 7.6 million workers' earnings, and lift 300,000 Americans above the poverty line.


Courtesy: CBO report

The CBO's estimate of the minimum wage's effects on jobs can't be readily compared to the one it recently released for the impact of Obamacare. The report on the health care law's effects on jobs related mostly to labor supply - that is, how many Americans would be looking for work, and for how many hours. The minimum wage report concerns the law's impact on labor demand.

The CBO's estimate of the employment effects of a minimum wage hike was derived from academic studies of past increases that reported findings in terms of the aggregate effect on labor demand.

Based on its assessment of a wide range of studies on the minimum wage, there are two ways that raising the wage could reduce employment. One is that an increase would raise costs for employers, who would raise prices, which in turn would lower sales, leading to fewer jobs. The other is that it would increase the cost of workers relative to other inputs, such as machines, technology and fewer workers with higher productivity, leading managers to shift away from minimum-wage workers and toward those other inputs.

Those job-killing effects would be offset by an economy-wide increase in demand, as those receiving the higher wages through the law would ramp up their spending.


Courtesy: CBO report

The CBO, which serves as Congress' nonpartisan budget scorekeeper, projected that the budgetary effects of raising the minimum wage "would probably be a small decrease in budget deficits for several years but a small increase in budget deficits thereafter."

Although the CBO usually releases scores for individual pieces of legislation or issues reports required by law, it sometimes publishes studies on important topics. A number of members of Congress have introduced legislation relating to the minimum wage.

Republicans immediately seized on the report's findings that a minimum wage increase would decrease employment, with a spokesman for House Speaker John Boehner stating that "our focus should be creating – not destroying – jobs for those who need them most."

The White House also responded to the report soon after it was published, touting the study's findings on poverty and family incomes but objecting to its projections of job losses in a blog post. On a conference call with the media, Council of Economic Advisers Chairman Jason Furman directly challenged the CBO's analysis of the academic literature on the minimum wage's effects on employment, saying that the report's findings "do not reflect the overall consensus view of economists."

The CBO's report "is not a piece of original research," said Furman, who explained that "sometimes you have to have respectful disagreement between economists."

"Our view is that zero is a perfectly reasonable estimate of the impact of raising the minimum wage on employment," Furman said on the call.

Tuesday's conference call was the second time in the past few weeks that Furman responded to a CBO publication, after a report showing Obamacare leading to a reduction in work earlier in the month created a political headache for the White House. In that instance, Furman explained, he simply tried to correct widespread misinterpretations of the CBO's analysis. This time, he disagreed with the CBO's findings.

This story was first published at 2:29 p.m. and was last updated at 4:35 p.m.

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