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Understanding the CBO Analysis of a Minimum Wage Hike
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Three weeks ago the powerful political momentum favoring a large minimum wage hike received a major setback as the Congressional Budget Office (CBO) released its report indicating that the Democratic goal of raising the minimum wage to $10.10 might lead to the loss of 500,000 jobs.

The CBO is widely respected as non-partisan in its economic analysis, and indeed Douglas Elmendorf, its current head, has a strongly Democratic-leaning background. Republicans and business lobbyists quickly seized upon the conclusions as proof that their longstanding arguments against a minimum wage hike had been correct all along, and that any proposal that risked a half million jobs in these difficult times would be disastrous, amounting to a cynical political effort driven by populist appeal rather than objective economic sense. Their biting accusation was that desperate Democrats were willing to kill jobs in hopes of winning votes from the gullible.

The immediate Democratic response to the report hardly put these fears to rest. Jason Furman, President Obama’s chief economic advisor, largely dismissed the CBO estimates, suggesting that few if any jobs might be lost if the national wage-floor were raised, and claiming that the estimates were contradicted by numerous academic research studies providing contrary conclusions. Such an argument is hardly persuasive. All interested parties in the endless minimum wage debate can always cite numerous academic studies to bolster their case, but the CBO is regarded as relatively neutral and impartial, so merely dismissing those official numbers as “wrong” is not reassuring.

Furthermore, any honest advocate of a minimum wage hike must certainly grant that a large increase would surely produce some level of job loss, and raising America’s national wage floor from $7.25 to $10.10—a jump of 40%—is hardly insignificant. The CBO report suggested that somewhere between zero and one million jobs might be lost as a consequence, with the most likely figure being in the 500,000 range. Now I claim no great economic expertise myself and have certainly not reviewed the underlying calculations, but such figures seem perfectly plausible to me. However, I believe that the contending parties and the media have severely misinterpreted their meaning.

First, how substantial is the potential loss of 500,000 jobs relative to the size of the American workforce? One useful point of comparison is number of workers who would benefit from that same minimum wage hike, and when we include the “spillover effect,” most estimates put that total at roughly 25 million, a figure fifty times greater than the likely job loss. So one way of presenting the numbers is that of the low-wage workers directly impacted, roughly 98% would benefit—in most cases by thousands of dollars per year—and 2% would lose. Major changes in government policy inevitably produce both winners and losers, and I would think that any proposal in which the former constitute 98% of the total should be considered remarkably successful.

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America’s population of low-wage workers themselves certainly come to this exact same conclusion, supporting a large minimum wage hike in overwhelming numbers. To the extent that they are the population group directly impacted—for better or for worse—should not their own wishes be considered a determining factor?

Consider also that the growing desperation of this exact low-wage population has made them a leading source of government lottery-ticket sales, vainly hoping that a lucky number will improve their miserable economic plight. For most such workers, the fully capitalized value of the proposed minimum wage hike is close to $100,000 cash-money, and such a hike gives them a 98% chance of winning that amount rather than the 0.0001% chance that buying a scratch-off at 7-Eleven might give them. Is it morally right for the elected officials to deny them the former while encouraging them to squander part of their weekly household-budget on the latter?

And how much would the losers really lose? Economic logic indicates that job-losses would tend to be concentrated at the lowest wage-levels since those are the workers for whom an employer would find the jump to $10.10 most difficult to justify in business terms. But bread-winners currently earning $7.25 or $7.50 already exist at the poverty-level and have high employment turn-over, while also receiving enormous social welfare subsidies from the government. So in many cases neither their personal difficulties nor the amount of their taxpayer benefits would be hugely different if their job suddenly disappeared.

Business lobbyists often disingenuously often cite the problem of teenager unemployment as their primary talking-point against proposals for a reasonable minimum wage, and it is certainly true that many teenagers currently earn at or just above the current minimum wage level, meaning that they might represent a disproportionate fraction of those job-losers, perhaps endangering their early chance for advancement on the economic ladder.

But teenagers are merely a minuscule and easily targeted fraction of those workers directly impacted by a large minimum wage hike, suggesting an obvious solution for those greatly concerned with the particular issue. A large rise in the minimum wage would automatically save the government huge sums in existing social welfare spending, and a small fraction of that could be used to fund a business tax credit subsidizing the hiring of teenagers, perhaps even a figure as high as a couple of dollars an hour. The amount of the subsidy could be adjusted to substantially reduce the teenager unemployment, perhaps even to a level below that existing today. Personally, I am no huge fan of such government interventions in the market, but for those who rank teenage unemployment as an overriding concern, the fix is easily at hand.

The contentious issue of immigration should also be considered, though Democrats are very reluctant to do so. Business lobbyists and doctrinaire libertarians might shed crocodile tears over the 500,000 workers whose jobs are endangered by a minimum wage hike, but these exact same groups endorse our very high current levels of immigration, whose economic impact upon existing workers is vastly more negative. During the last decade, over ten million foreigners immigrated here, most being exactly the same sort of lower-wage workers, thereby either displacing existing job-holders or exerting severe downward pressure on wages; the inexorable Law of Supply and Demand is regularly ignored by pro-immigration economists. Indeed, last year I published a piece in Salon specifically arguing that a large minimum wage hike must be included as part of any immigration amnesty passed by Congress, and economics writers at both The New Republic and National Review explicitly endorsed my $12 per hour minimum wage proposal on exactly those same grounds.

The Pew Research Center has estimated that eight million illegal immigrants currently hold jobs in America, probably constituting over 10% of all our wage-earners, and their most recently arrived cohorts, with no American work history and little English, are probably concentrated at the lowest pay levels, being among the few job-seekers desperate enough to eagerly take employment at $7.25 per hour, with businesses forced to violate the law and hire them for exactly that same competitive reasons.

So when the CBO suggests that 98% of low-wage workers will get a raise and 2% might lose their jobs, we can be sure that a greatly disproportionate share of that 2% will be individuals whose employment the government has allegedly been trying to block for years. Most businessmen would rather obey the law than not, and once a minimum wage of $10.10 allowed them to attract job applicants who spoke English and were here legally, they would be much more likely to do so. My own very rough estimate is that between one-third and one-half of the CBO’s 500,000 estimated job losses would fall among the undocumented, thus transforming a minimum wage hike into exactly the sort of immigration-enforcement measure that former Democratic Presidential Nominee Michael Dukakis had once suggested.

Combine this immigration argument with a business tax-credit for hiring teenagers, and it seems likely that the true figure of net lost jobs shrinks to just a fraction of that suggested by the CBO and just a tiny sliver of the tens of millions of legal workers who would benefit from a wage hike. Instead of undercutting the practical case for much higher minimum wage, when interpreted properly the CBO report strengthens it immensely.

 

Finally, the CBO conclusions seem to totally demolish one of the central economic dogmas presented by ideological opponents of minimum wage laws.

Rigidly doctrinaire libertarians argue that minimum wage laws serve no valid purpose since our free market in labor ensures that employers must pay all workers their true economic value, no more and no less. Thus, they say that if a worker earns $8.50 per hour, that is the approximate value of the labor he produces and his job would disappear at any higher required wage. By contrast, economists who support a minimum wage suggest that low-wage businesses benefit from their “monopsony” position in the labor market, and regularly use that great market power to pay workers less than their true value, much like a monopolist can unreasonably bid up the price of his products.

This obscure technical dispute is central to the theoretical basis for minimum wage laws, and I would argue that the CBO figures decisively resolves this question. According to the CBO, some 98% of those low-wage workers impacted by a 40% hike in the minimum wage would keep their jobs at a much higher rate of pay, thereby demonstrating that their economic value to their employer was vastly greater than their current rate of pay, which had been artificially reduced due to their lack of effective bargaining power. When 98% of workers are paid below their true economic value, any assumptions of a truly efficient market in labor are absurd, and the rectifying impact of a higher minimum wage becomes absolutely justified.

Thus, on both theoretical and practical grounds, the CBO report demonstrated the exact opposite of what the contending parties in the minimum wage debate seemed to suggest. Perhaps journalists will eventually begin reporting this more correct interpretation of the stated facts.

 
• Category: Economics • Tags: Minimum Wage 
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  1. Joe Webb says:

    very good piece. I would like to see some discussion of a nationalist economics and how it would work. Clearly, Capital flees the US or Europe, having been made here in the first place, and seeks a better deal abroad. This causes disequilibrium in labor and capital markets

    Of course, the mad scramble goes on apace, and to hell with the losers. The losers mostly are working people who are placed in “unfair” competition with foreign low-wage workers. Mostly (deliberately) overlooked are professionals who escape the competition of the whole globe…you do not go to China for a toothache, etc.

    “fairness” is not a word in the lexicon of economists, but it is in the lexicon of politics.

    Without going into the problematics of globalism, we need a consideration of a National Capitalism that would be semi-autarkic and thereby severely restrict capital going abroad.

    Less Money and More Country is the argument.

    Any economists out there? You can use a fake name.

    Joe Webb

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  2. Anonymous says: • Disclaimer

    There is one important part of the CBO claim of job losses that is missing here. CBO says their result is not statistically significant! The entire “job loss” is within the margin of error. In technical terms, it is a “one sigma” result. That means it is no result at all.

    I went and flipped a coin 50 times. I got a one sigma result. Does that mean I have proven that tails really is more likely than heads. Not at all. I am measuring noise, not any real effect.

    And this has been repeated again and again. Each study that has attempted to quantify job losses from an increased minimum wage ends up with the same conclusion that any losses can’t be measured. The result is not statistically significant. The data is indistinguishable from noise. So CBO applied that science to the current proposal and of course came up with the same answer.

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