CBO Report Shows Low-Wage Workers Would Be Better Off With a Minimum Wage of $10.10

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 $55,700This 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.

  • Linda Warnke

    Why are we still measuring the value of labor by hours worked?
    The hourly wage, and the 40-hour work week, are obsolete. Productivity, which is the REAL measure of labor value, is no longer tied to hours worked. One man today can generate the output of many men with technology and automation. Instead of crafting one widget an hour, he can make 50. So, that company owner now has 49 extra widgets per hour to sell, which gives him a windfall. But he still pays that one worker by the hour. Does anyone see the obvious problem here?
    Even if you gave the guy a raise it doesn’t compensate him properly for his increased productivity, not if you insist on keeping the hourly-wage standard. You can’t raise it enough to correct the imbalance without ending up with 30 dollar an hour busboys. which is not going to help the economy.
    I don’t know if anyone realizes that our economy is changing in a very fundamental way, and I mean revolutionary change. Something on the lines of the Industrial Revolution. This is NOT simply an economic slowdown, this isn’t going to be fixed with some adjustments here and there. The entire system is being reset right before our eyes. This is new and different, and we have no idea how to fix it using our standard tool box.
    The public is going to have to be educated on this, and fast. No one is telling them about the problems coming, everyone seems to think this is just another one of those annoying recessions that will end soon, with everything going back to normal again. Well, it’s not, and it won’t be, ever. People are NOT going to be going back to work as they were before, and at some point even the most hardcore right-winger is going to have to abandon the usual “He who doesn’t work shouldn’t eat’ line. It’s one thing to say that about a few lazy moochers, but when it suddenly becomes half your neighborhood, your friends, your family, then you… well then. The fundamentals have changed, and the problems are beginning to cause systemic malfunctions which will only become worse. Things are not working as they should, and the usual solutions aren’t having the expected results anymore. Raising the minimum wage for example, while it will give some folks a few bucks to spend, will also end up hurting those small, labor-dependent businesses that can least afford it. While having little effect on the bigger enterprises that have already been reducing their workforces as fast as they can.
    I wish there were more folks paying attention to this, and discussing it. Do you ‘economic thinkers’ ever brainstorm this issue? I NEVER see it addressed anywhere, and it makes me crazy that it is being ignored.