A Note on Raising the Minimum Wage

The Congressional Budget Office’s (CBO) recent report on the effects of a minimum-wage increase on employment and income has earned a lot of attention, mostly because  Democrats seem to be planning a vote on legislation to raise the minimum wage.

President Obama has already, through executive order, raised the $7.25 minimum wage federal contractors must pay workers to $10.10 per hour (beginning January 1, 2015 on new contracts).  The President’s executive order was of course meant to be a precedent for a broader bill.

Raising the minimum wage serves the Democratic agenda in two ways.  First, it is designed to mitigate objections that their immigration reform program will harm low-wage workers by flooding the labor market.  Second, it fits nicely into the President’s attack on what he sees as the mal-distribution of wealth.  Senate Majority Leader Harry Reid, has made this point on his Twitter account:  ”The Koch bros made over $18 billion last year, but middle-class families have watched their incomes stagnate for decades. #Raise the Wage”

However satisfactory it would be to pick the Koch brothers’ pockets, it isn’t clear that raising the minimum wage will get the job done.  Consider this paragraph from the CBO report:

“Increasing the minimum wage would have two principal effects on low-wage workers.  Most of them would receive higher pay that would increase their family’s income, and some of those families would see their income rise above the federal poverty threshold.  But some jobs for low-wage workers would probably be eliminated, the income of most workers who became jobless would fall substantially, and the share of low-wage workers who were employed would probably fall slightly.”

In other words, it looks like one of the economic effects of the minimum wage would be in the form of a transfer payment from some poor workers to other poor workers.  That many more workers might benefit compared to those thrown out of work is not a compelling argument for those in the latter category.

How many workers would lose their jobs if the minimum wage is raised?  If the wage were raised to $10.10, CBO’s “central estimate” for the second half of 2016 is a loss of 500,000 jobs.  By contrast, raising the minimum wage to $9.00 yields a “central estimate” of 100,000 jobs for the same time period. The White House argues that the CBO’s estimate for job losses is wildly inflated.  In fairness to CBO, it presented a range of possible employment impacts with, as noted, the 500,000 and 100,000 numbers characterized as “central estimates.”  So, yes, job loss could be less; it could also be much higher, too.

The number of workers potentially affected by a minimum wage increase is considerable.  According to an interesting study from Brookings, only 2.6 percent of workers are paid the minimum wage, “but 29.4 percent of workers are paid wages that are below or equal to 150 percent of the minimum wage in their state” (some states have minimum wages higher than the federal minimum wage). These latter workers, if history holds true, would also see increased hourly compensation as part of a ripple effect.

The Brookings scholars conclude that “35 million workers from across the country could see their wages rise if the minimum wage were increased.” To their credit, the authors of the Brookings study “hasten to note that a complete analysis of the net effects of a minimum wage increase would also have to account for potential negative employment effects.”  Their piece does not provide this “complete analysis.”

The attraction of raising the minimum wage as a kind of magic bullet to help low-wage workers is undeniable.  And its political attractiveness has been made all the greater by the failure of opponents to make the case for pro-growth, pro-job policies.  The exhaustion of faith in our economy and in the efficacy, or even possibility of economic growth through private sector expansion, is the best friend that proponents of an increase in the minimum wage could hope for.

As ever, when the pie doesn’t grow, the temptation to reslice is hard to resist.