CBO Is Right: Minimum Wage Hike Can Kill Jobs
The Congressional Budget Office's report on the effects of a higher minimum wage has caused gnashing of teeth on the left. It was bad enough when the CBO said the Affordable Care Act would reduce employment. Now this?
The CBO's non-aligned economists say the proposed increase to $10.10 would lift around 900,000 people out of poverty, as intended, but might also eliminate 500,000 jobs. They stress the wide range of uncertainty around both numbers -- but that's not good enough. The idea that the proposal might not be a free lunch, as most liberal commentators insist, called forth accusations of bad faith.
"That CBO Report on Obama's Minimum-Wage Proposal is Remarkably Biased," reads the headline on Mike Konczal's piece for the New Republic. Not just biased, please note -- remarkably biased.
I'd say the CBO deserves to be congratulated, as usual, for a thorough and balanced reading of the evidence. (In this space, "balanced" is a term of approbation. Just so you know.) The report explains the reasoning behind the estimates at length, and I see nothing to quarrel with. The bottom line is entirely plausible: Raising the minimum wage has advantages (relieving poverty) and disadvantages (it may reduce employment). Such is the real world.
What about the supposed academic consensus on this subject? A letter to Congress supporting the increase was signed by 600 economists. It referred to "the weight of evidence now showing that increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labor market." The White House made a lot of this in responding to the CBO's findings.
There are several problems here. First, it's a tad misleading about the nature of the consensus. There's plenty of evidence on both sides of the debate: If there is a consensus, it's weak. Second, "little or no" job loss is vague. It means, "Don't worry about it." But it doesn't mean zero. What's the upper bound of "little"? For all I know, some of the 600 would deem a drop of 500,000 jobs as falling below it. Third, and most important, previous increases in the minimum wage -- the increases that form the "weight of evidence" -- have mostly been smaller than the proposed increase from $7.25 to $10.10. The CBO rightly emphasizes this.
The proposed increase would take the inflation-adjusted minimum wage to its highest level in more than 40 years. It would be unusually high, as well, in relation to market incomes, exceeding the 10th percentile of workers' wages, again for the first time since the 1970s (see chart). In addition, the new rate would be indexed -- hence permanent, unlike all previous increases. (In purchasing-power terms, by the way, a minimum wage of $10.10 would be among the highest in the advanced economies.) Finally, the 600 talk of little or no effect "even during times of weakness in the labor market." Maybe, but when was the labor market last as weak as this? And when has it ever been both this weak and asked, at the same time, to absorb the effects of a major health-care reform that will raise the cost of labor to at least some employers.
In all these ways, what's proposed is a little out of the ordinary, and the CBO is right to bear this in mind when considering evidence drawn from previous increases.
One other thing should also be borne in mind. There's a way to raise low incomes that is certain to increase the demand for labor -- unlike raising the minimum wage, which may reduce it. Increase (and widen eligibility for) the earned-income tax credit. As the CBO report mentions, the EITC is also much better targeted on low-income households, the intended beneficiaries.
Why won't the left campaign for a bigger, better EITC with a tenth of the energy it devotes to campaigning on the minimum wage? That's some remarkable bias.
(Clive Crook is a member of the Bloomberg View editorial board. Follow him on Twitter @clive_crook.)
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