Understanding CBO’s Minimum-Wage Report
SOURCE: AP/Jacquelyn Martin
The Congressional Budget Office’s, or CBO’s, recent report that projects the impact of increases in the minimum wage has generated a good deal of controversy. Much of that controversy has been the result of the fact that by and large, coverage of the report has not provided a complete context in which to view the agency’s projections—blurring the fact that the benefits of raising the minimum wage far outweigh the costs.
First of all, CBO does not project that job opportunities for low-wage workers will decline over the next three years if the minimum wage were raised from the current $7.25 to $10.10 per hour, as so many have reported. Only a few weeks ago, CBO published its economic and budget outlook for 2014 to 2024, which estimated that U.S. employment will grow by 7 million jobs between now and 2018. Of course, that projection is based on a number of assumptions about the future that are little more than educated guesses.
The most important of these from the standpoint of job creation is the overall growth rate of the economy. For instance, CBO is projecting a 2.7 percent increase in real gross domestic product in the current fiscal year, while many economists are projecting significantly faster growth. In fact, the midpoint of the forecasts in the Federal Reserve’s Open Market Committee report of December 18 was 3 percent, and the lead story in a recent edition of the investment publication Barron’s touts the forecast of Applied Global Macro Research, which argues that the scale of the current housing recovery will push growth this year and next to 4 percent. Such growth rates would increase employment by 2018 to well over 8 million and perhaps as many as 10 million jobs.
Conversely, slower growth would slow job creation. It is very unlikely that employment growth will stall completely, as it did for an extended period in the past decade, or that it will grow by more than half a million jobs per month, as it did for a significant period of time in the 1990s. But it will still grow by considerably more than half a million jobs, more than offsetting the negative impact that the CBO has projected if the minimum wage is increased to $10.10.
Secondly, the probability is that the United States will see somewhere between 5 million and 10 million additional jobs by 2018, with or without an increase in the minimum wage. Factors other than the minimum wage, such as fiscal policy, interest rates, and oil prices, will largely determine which end of that 5 million job range we will be closest to.
As the uproar over the CBO analysis demonstrates, the issue of whether jobs are gained or lost as a result of a minimum-wage increase depends largely on how we analyze the vast amount of research that has been conducted on the question over the past half-century. As a recent Center for Economic and Policy Research paper points out, the studies done since 2000 provide much more solid evidence that there is in fact little discernable correlation between the minimum wage and the pace of job creation.
That’s what makes CBO’s decision to avoid expressing its own view on this thorny and contentious issue so problematic. It attempted to dodge the partisan brickbats being hurled by both sides in this debate by picking a number that it could argue was representative of the midpoint of academic projections. But while the midpoint it chose may be the midpoint if projections that are two or more decades old are included, it is certainly not the midpoint of research conducted over the past decade and a half.
Perhaps the bigger question, however, is whether the minimum wage will be an effective means of slowing the growth of income disparity in the United States. CBO gives a clear and definitive answer on that score—despite the fact that many of us might quibble with its job-loss number. If we accept the facts that the proposed minimum-wage increase would slow job growth over the next three years from the CBO-projected 7 million to only 6.5 million, and that lower-income families would absorb nearly all of that loss, we would see a decline in these families’ incomes of about $7 billion—assuming that the half a million jobs lost paid an average wage of $8 per hour on a 35-hour work week that provided employment for 50 weeks out of the year.
But CBO estimates that 16.5 million workers would see their wages increase and that the total annual increase in wages for those workers would be $31 billion. This leaves low-income workers $24 billion better off even after we account for slower job growth. Add in the impact of slightly higher consumer prices, and low-income families are still $19 billion better off. And as CBO points out, it is not just these families that benefit. On average, households with incomes of less than about $125,000 would benefit as well, and households with incomes of $30,000 to $65,000 would get an average of about $200 more per year. Families with incomes of less than about $30,000 would get an average of more than $300 in additional income per year. Most striking is the fact that this one piece of legislation would lift about 900,000 Americans out of poverty.
It is evident, therefore, that even with its controversial projection of job loss, CBO makes a strong case for congressional action to raise the minimum wage.
Scott Lilly is a Senior Fellow at the Center for American Progress.
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