Congressional Budget Office and the minimum wage

I was not at all surprised last week when the Congressional Budget Office issued a report claiming that increasing the minimum wage would cost jobs. They did not do the work themselves so much as rely on work that had been done by others. The finding is in line with standard economic thinking. Think supply and demand. When the price goes up demand goes down. So when the price of labor goes up one would expect that the demand for labor to go down. That translates into lost jobs.

So is there a problem with the CBO report? Should we be concerned with the job loss estimate? Sometimes it helps to jump a bit outside of the box. So cost for labor goes up and jobs go down. But this logic applies regardless of the wage level. Would we be arguing that we should not give the middle class a pay increase because it would cost them jobs? Would we be arguing that we should not give the CEOs a pay increase because it would cost some of them their jobs? I don’t think so. If not them why are some arguing not to increase the minimum wage because it well cost jobs?

Then the models that the CBO used just may not be quite right. A business has other options on how to recoup the extra cost of the labor due to an increase in the minimum wage. They can opt for a price increase. They can choose not to give other higher paid workers a pay increase. They can look to automation and cut jobs at all levels. They can decide to move some jobs off shore where wages are lower. Some of these results in a job loss in the United States in ways the CBO may not have considered.

Interestingly Politico reported that some Republicans suggested that instead of increasing the minimum wage we expand the earned income tax credit. This sounds like a tax increase to me. Also doesn’t that amount to the taxpayers subsidizing the companies that pay the minimum wage?

Remember also that a lower minimum wage allows me to buy a cheaper hamburger at McDonald’s. Are my hamburgers being subsidized at the expense of those who cannot make a living wage?

I am just thinking some random thoughts. I am just asking some random questions that should be considered in the debate.

2 Comments

  1. Jack says:

    I don’t understand why people persist in listening to economic models on this. There are now a large number of cases where countries have introduced minimum wages and increased minimum wages; in every case opponents have argued that these will hurt jobs and in every single case they’ve turned out to be completely or almost completely wrong.

  2. Rob says:

    It’s worth looking at what top economists actually believe before writing them off completely. IGM runs a poll of the top economists in the field on a variety of interesting questions.

    Here is the poll on raising the minimum wage. http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_br0IEq5a9E77NMV

    Economists are pretty evenly split about whether a $9 minimum wage would make it harder for low skilled worker to find employment. On the other hand, a majority of them believe that the benefits of a moderate minimum wage outweigh the costs. (The votes might have been different if they had been asked about a 10 or $15 minimum wage, at some point the disadvantages swamp the advantages).

    That said, I don’t think Larry’s argument is correct. The CBO/economists would definitely predict that a forced pay increase would cause a decrease in employment. This is different from a voluntary pay increase. If a company found it was making more money than expected/it’s middle class workers became more productive and it decided to raise their salaries, that is unambiguously a good thing. If the government came in and forced all companies to raise middle class wages by $10 per hour, that would cause a lot of problems/ cause jobs to disappear.

    In contrast to Jack’s point, I would say the empirical evidence is not so clear cut.

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