Tuesday’s CBO report on the effects of increasing the minimum wage has generated a lot of discussion. While some of the CBO’s findings are consistent with our own analysis, we have some serious disagreements. Here’s our take on the report, particularly CBO’s estimates on employment and income (we focus on their estimates of the effects of increasing the minimum wage to $10.10 by 2016).
The report finds that 16.5 million workers who make below $10.10 would get a raise, and an additional 8 million workers who make slightly above $10.10 would also likely get a bump (since employers like to preserve internal wage ladders). This is right in line with our estimates of the likely impact.
They found that the increase in the minimum wage would benefit mostly adults who need the earnings from their minimum wage job to make ends meet: less than 12 percent of the people who would get a raise are under age 20 and more than 70 percent of the total earnings would go to workers in families whose income is less than three times the poverty threshold. For context, in 2013, three times the poverty threshold for a family of three was around $55,700. This too is right in line with our analysis.
CBO also found that 900,000 people would be lifted out of poverty. We agree that raising the minimum will lift a significant number of people out of poverty, and if anything, CBO’s estimate here seems conservative. CBO is a bit vague on how they came to their conclusion about the effect on poverty levels, but from what we can tell, it seems that they looked at current income levels, expected poverty levels in 2016, simulated how peoples’ incomes would change following the minimum wage hike, and estimated the change in the number of people in poverty. This is a perfectly reasonable approach; however, there’s a good body of research that has looked at the real-world experience of how minimum wage hikes have affected poverty levels. A recent paper by Arin Dube looks specifically at this question and estimates that in the past, for every 10 percent increase in the minimum wage, we’ve seen a 2.4 percent decrease in the number of people in poverty. This implies that increasing the minimum wage to $10.10 could reduce the number of people in poverty by as much as 4.5 million.
Notably, CBO estimates that increasing the minimum wage to $10.10 would cost 500,000 jobs—a finding that we disagree with.
It’s important to note that the economists at CBO didn’t do their own analysis on the employment impact of increasing the minimum wage—they looked at the academic literature on this subject and arrived at a conclusion about what it showed. In other words, they used exactly the same information that the more than 600 economist who signed a letter in support of increasing the minimum wage to $10.10 were looking at when they concluded that increasing the minimum wage will raise the wages of low-wage workers with little or no negative effect on employment.
CBO acknowledged that the methods of more recent studies, particularly studies of state-by-state difference that address the fact that changes in state minimum wages can be correlated with local economic conditions in ways that can bias results, “have estimated more accurately the effects of minimum wages on employment.” These are the studies that show that increases in the minimum wage have caused little or no job loss. Nevertheless, they still gave consideration to older methodologies, which show significant negative effects. By doing so, they ultimately picked an estimate that is more negative than the current consensus.
The CBO does emphasize the uncertainty in their estimate, noting that their estimate is part of a large range of plausible estimates that includes “a very slight reduction in employment” (which we assume can be taken to mean basically indistinguishable from zero). In other words, their range of estimates—which they believe there is only “about a two-thirds chance” that the real impact would fall within—includes no effect on employment.
Also, CBO doesn’t describe how their forecasted negative employment effect would play out on the ground. Importantly, it would not take the form of workers losing good jobs they’ve been in for a long time. Minimum wage jobs are almost by definition our economy’s lowest-quality jobs, and they tend to have extremely high turnover. What an employment decline looks like in this context is that job seekers will spend a little longer looking for a job that – due to the minimum wage hike — will pay much more. On net, even those experiencing negative job effects end up big winners.
Lastly, even if you accept their employment effect, it is important to note that they find that low-wage workers as a group are unambiguously better off, with their earnings increased by $31 billion.