Wednesday, February 19, 2014

Even the CBO Recognizes the Unintended Consequences of Minimum Wage

My guess is that this was in reaction to Obama wanting to raise minimum wage, but even if that's not the case, it was fun to read the Congressional Budget Office (CBO) published a report yesterday on the effects on minimum wage. What did the CBO have to say about minimum wage? Here are a few of my favorite points from the report:

  • By the end of 2016, "[raising the minimum wage to the] $10.10 option would reduce total employment by about 500,000 workers, or 0.3 percent (p. 1)." Aside from the fact that this number was close to the prediction I made last week, I find it interesting that in order to lift 900,000 people out of poverty (p. 3), it would be acceptable for some to "pay" the price of making 500,000 unemployed, which is odd for a policy that is allegedly anti-poverty. 
  • "The increased earnings for low-wage workers resulting from the higher minimum wage would total $31 billion, by CBO's estimate. However, those earnings would not go only to low-income families, because many low-wage workers are not members of low-income families. Just 19 percent of the $31 billion [i.e., $5.89B] would accrue to families with earnings below the poverty threshold, whereas 29 percent would accrue to families earning more than three times the poverty threshold (p. 2)." Why is it that a policy that is supposed to fight poverty helping out the middle class more than it is the poor?
  • "Moreover, the increased earnings for some workers would be accompanied by reductions in real (inflation-adjusted) income for people who became jobless because of the minimum-wage increase, for business owners, and for consumers facing higher prices (p. 2)." 
  • "The net effect on the federal budget of raising the minimum wage would probably be a small decrease in budget deficits for several years but a small increase in budget deficits thereafter (p. 2)."
  • Even with the overall, net real income increases that the CBO estimates, "real income would decrease, on net, by $17 billion for families whose income would other have been six times the poverty threshold or more, lowering their average family income by 0.4 percent (p. 3)." 
  • "At first, when the minimum wage rises, some firms employ fewer low-wage workers, while other firms do not; the reduced employment is concentrated in businesses and industries where higher prices result in larger reductions in demand. Over a longer time frame, however, more firms replace low-wage workers with inputs that are relatively less expensive, such as more productive higher-wage workers. Thus, the percent reduction in employment of low-wage workers is generally greater in the long term than the short term (p. 7)." Or in layman's terms, "way to stick it to poor people by making it harder to find work!"
  • "In the long term, [the] reduction in the workforce lowers the nation's output and income a little (p. 8)."
  • "About 16.5 million workers who will earn less than $10.10 per hour under current law would receive higher wages (p. 11)." I bring this up because the White House estimated that 19 million would direct benefit from the minimum wage hike, which just makes the White House look bad for overestimating the benefits to make a point.
  • "The Affordable Care Act's requirement that many employers provide health insurance (or pay a penalty if they do not) will impose an additional cost on employers for some low-wage workers who do not currently have employment-based health insurance. CBO expects that the cost will ultimately be broke by workers through lower wages; but before that adjustment has fully taken effect, the cost further boosts the likelihood that employers' savings from reducing the size of their workforces would exceed their adjustment costs (p. 23)."

While minimum wage helps some people escape poverty, which is to be expected, it is not at all surprising that minimum wage also renders 500,000 citizens unemployed, thereby making it more difficult for others to escape their economic plight. There are arguably better policies to deal with low wages, such as the Earned Income Tax Credit or a wage subsidy. 500,000 unemployed might not sound too bad, but combine that with the Obamacare-induced job loss of nearly 2.5 million full-time equivalent, and you're talking about a whole lot of job loss on Obama's watch. In spite of the CBO's methodology that overstates benefits and understates costs, it's refreshing to confirm what I have been saying about minimum wage all along (see here, here, here, and here), which is that minimum wage creates more joblessness, it's far from being a silver bullet for eradicating poverty, and employers will find ways to pass on the costs to compensate for the wage increases.

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