CBO Whiffs on Minimum Wage
The Congressional Budget Office has just issued a report on the minimum wage that is a real head-scratcher. Analyzing proposals to raise the minimum wage to $9.00 or $10.10 per hour, it concludes in the latter case that there would be 500,000 fewer jobs in the second half of 2016 than there would be under current law (100,000 fewer for $9.00/hr.).
Predictably, conservatives have seized on this number as proof that the minimum wage is a “job killer.” Even liberal media, such as Talking Points Memo in this paragraph’s link, seem to think that number is a big problem, going on to say, “It’s not all bad, though, for one of the centerpieces of Democrats’ middle-class agenda ahead of the November congressional elections,” as if the CBO report were mostly bad news for Democrats.
There are two problems with these claims. First, the CBO’s calculations undervalue the best research on the minimum wage. Second, even in the CBO’s estimated world, low wage workers are much better off as a whole than under the current $7.25/hr. minimum wage.
As I’ve discussed before, a relatively crude cross-national comparison of rich countries’ minimum wages and unemployment rates does nothing to suggest any job-killing is going on. But the CBO’s estimation procedure has serious flaws. It begins (p. 6) with what it calls “conventional economic analysis,” which is already a big mistake. Simple Econ 101 reasoning (when the price of something goes up, the quantity purchased goes down) has had only sketchy empirical support, something that has been especially clear from meta-analysis of minimum wage studies (ungated version of Doucouliagos and Stanley 2009 here).
The CBO, of course, has heard of these studies, but it remains with a non-transparent explanation of how it weighted different studies (p. 22), saying it gave the most weight to contiguous state comparison studies. The only thing is, according to Arindajit Dube, these are the studies least likely to find a negative employment effect. Thus, how CBO ends up with a baseline of job loss remains mystifying.
Okay, so 500,000 fewer jobs isn’t entirely plausible then, but what if we accept for the moment that it is? As Jared Bernstein and Dean Baker point out, there are still far more winners (16.5 million direct, another 8 million indirect–the latter being workers just above $10.10 who would probably see raises) than losers (0.5 million among low-wage workers; the rest are people with high incomes) in this scenario. And as Baker emphasizes, “…we are not going to see 500,000 designated losers who are permanently unemployed as a result of this policy.” Instead, what will happen is people will work 2% fewer hours at an hourly rate that is 39.3% higher.
The math is simple: 0.98 X 1.393 = 1.365. In other words, low-wage workers will see their income increase, on average 36.5%. And this is the worst-case scenario!
I’ve said it before, and I’ll say it again: the minimum wage is a winner both economically and politically.
Cross-posted at Middle Class Political Economist.
thanks kenneth
i guess we can say that CBO is no longer “non partisan.” Elmendorf?
A minimum wage, and raising the minimum wage. is needed to correct a “market failure.”
It’s ridiculous to reward work with poverty, e.g. because there’s abundant labor.
However, the country also needs more pro-growth or fewer anti-growth policies from politicians.
And, low wages, in itself, can cause low productivity.
Imagine if the minimum wage kept up with low-wage productivity growth, since 1968. The minimum wage would be at least $12.50 an hour today.
Tens of millions of workers would be happier and would’ve chosen work over government benefits or welfare.
They would’ve consumed more goods, saved more for retirement, paid more taxes, and consumed less government services.
Trade deficits would’ve been even greater (because consumption + saving = income would be higher) and there could’ve been budget surpluses instead of huge budget deficits (with appropriate policies from politicians). The national debt could’ve been much smaller..
Here are some ideas by economists:
Minimum Wage
“The argument that minimum wages decrease employment is based on a simple supply and demand model of the labor market. A number of economists (for example Pierangelo Garegnani, Robert L. Vienneau, and Arrigo Opocher & Ian Steedman), building on the work of Piero Sraffa, argue that that model, even given all its assumptions, is logically incoherent.
Michael Anyadike-Danes and Wyne Godley argue, based on simulation results, that little of the empirical work done with the textbook model constitutes a potentially falsifying test, and, consequently, empirical evidence hardly exists for that model.
Graham White argues, partially on the basis of Sraffianism, that the policy of increased labor market flexibility, including the reduction of minimum wages, does not have an “intellectually coherent” argument in economic theory.
Gary Fields…argues that the standard “textbook model” for the minimum wage is “ambiguous”, and that the standard theoretical arguments incorrectly measure only a one-sector market.
An alternate view of the labor market has low-wage labor markets characterized as monopsonistic competition wherein buyers (employers) have significantly more market power than do sellers (workers)…Such a case is a type of market failure and results in workers being paid less than their marginal value.
Under the monopsonistic assumption, an appropriately set minimum wage could increase both wages and employment, with the optimal level being equal to the marginal productivity of labor.”
it is rare that I agree with PT, but I think he does state a decent case for the minimum wage and increasing it. from a theoretical standpoint, I think there are two ways to look at the supply and demand models. From the labor market side, I would argue that in the short run the demand for minimum wage labor is highly inelastic. If the minimum wage of the fast food counter person goes from $7.50 to $15 tomorrow the fast food joint still needs a counter person. Now over a longer time period there is no question that the fast food joint will look even harder at ways to reduce the number of counter people it employs by bringing more capital to the process. If instead of a fast food joint you have a low end manufacturer, the demand is still inelastic in the short run, but the manufacturer is more likely to just send production to low wage parts of the world over the long haul. Of course, both phenomena have been going on since the dawn of the Industrial Revolution, but plainly there is an increase in incentive when you do not have an abundant supply of almost slave labor. I do not know that any economist thinks it is a bad thing for an economy to get more efficient and whatever arguments can be made about the horrible effects of globalization on low end labor, generally there is more economic output. I mean should we have banned automobiles 100 years ago because it put a lot of people making buggy whips out of work? The other issue is whether the demand for labor will decline because the demand for the product or service will decline with the price increase to cover higher labor costs. It is unlikely that the demand for the end product/service will be as inelastic as the demand for the labor in the short term although certainly if there are people providing essential services at minimum or near minimum wage the demand would stay inelastic–snow plow operators, garbage collectors etc. The problem I have with this effect reducing jobs is that it is not apparent to me that raising the minimum wage will lead to dramatic increase in the costs of the product or service and that paying labor a bit more could be made up by paying capital a bit less. I will take my fast food joint burger which sells for a dollar with the minimum wage at $7.50. I am guessing, but do not know that there is something like a 5 cent gross profit on that burger meaning that 95 cents represents the costs–the materials–beef, buns, condiments,packaging–, the energy–heating/cooling, lighting, grills–the rent for the establishment, warehousing of supplies, parking– advertising/marketing,–administrative expense, the CEO’s COOs, CFOs, accountants, lawyers etc and of course the labor for our counter person, cook and janitors. If all of the minimum wage workers contributed 5 cents to the 95 cent cost to produce the burger, I would be surprised and if that whole cost would be passed on to the consumer, the price of the burger would go from $1 to $1.05. This would cause no problem in a service business because the playing field would stay level, but could be a big problem for someone who is competing with foreign sourced goods. Further, even in our burger example people might decide that at $1.05 they will eat less burgers and get their BMI under 40, although I will believe that when I see it. my point is that there is no obvious reason why the whole nickel has to come from price. We could take a penny from the stockholders, we could take a penny from the CEO who may be making 3000 times what the minimum wage worker is making, we might get a half penny from other savings and end up with only a 2 or 3 cent rise in cost and whatever fall off demand that causes may well be made up by all those minimum wage workers who have twice as much money to spend on burgers.
Terry
i agree with you, and by way of reinforcing your argument i will add that I can’t imagine anyone deciding not to buy a burger because the price went up 25 cents.
But I also like the argument that Baker brings forth: it may be that a raise in the min wage “costs jobs”… that is min wage jobs. But that does not mean that some now employed person will become unemployed in any permanent or significant sense. It means, as Baker points out, that that person may lose two weeks of work over a year, while gaining 4000 dollars in pay over the same time, even with the two weeks spent looking for another job.
And there is a huge error in claiming that a min wage worker is only “worth” the min wage or less. The “worth” of labor, even min wage labor, is determined by “the market” which, as should be obvious to anyone, is determined by “power” more than by “economics.”
And, I am told, the rush to off shoring work was not driven by the cost of labor, but by the cost of money: the artificially high value of the dollar.
I doubt very much that economists are unaware of this, but those you hear from are those paid to support a political position… the “power” mentioned above… and the run of the mill businessman can’t think any further than this month’s balance sheet…. for which it is “obvious” to him that an increase in wages will cut his profits or force him to raise prices that will make him uncompetitive.
Terry
Let me also endorse what you say by highlighting something in Arin Dube’s article linked above. His critique of many studies is that they find high disemployment effects in manufacturing and virtually none in fast food, which goes against everything we think we know about these two industries. His work suggests that you need controls for region (the states with a high minimum wage are clustered in just a few regions), and once you do that the negative effect on employment disappears.
In addition, of course, high users of minimum wage workers, like fast food, are not mobile. They will not be harmed by an increased minimum wage, especially when it will apply to all competitors equally.
When I was a gypsy cab driver, back in the Bronx, back in the late 1980s, the (legit — with medallions, etc.) yellow cabs raised their meters and we raised ours in parallel with theirs. Everybody agreed that this did not hurt business. I also heard that the last meter raise cost a lot of business — I was new (finally got my driver’s license at age 32).
In any market, selling anything, you never know for sure what the customer will pay until you test. Does this chart below look like the minimum wage has been much tested (over multiple generations!!!)?
**********************
**********************
yr..per capita…real…nominal…dbl-index…%-of
68…15,473….10.74..(1.60)……10.74……100%
69-70-71-72-73
74…18,284…..9.43…(2.00)……12.61
75…18,313…..9.08…(2.10)……12.61
76…18,945…..9.40…(2.30)……13.04……..72%
77
78…20,422…..9.45…(2.65)……14.11
79…20,696…..9.29…(2.90)……14.32
80…20,236…..8.75…(3.10)……14.00
81…20,112…..8.57…(3.35)……13.89……..62%
82-83-84-85-86-87-88-89
90…24,000…..6.76…(3.80)……16.56
91…23,540…..7.26…(4.25)……16.24……..44%
92-93-94-95
96…25,887…..7.04…(4.75)……17.85
97…26,884…..7.46…(5.15)……19.02……..39%
98-99-00-01-02-03-04-05-06
07…29,075…..6.56…(5.85)……20.09
08…28,166…..7.07…(6.55)……19.45
09…27,819…..7.86…(7.25)……19.42……..40%
10-11-12
13…29,209…..7.25…(7.25)……20.20?……36%?
*********************
*********************
What should happen is that purchasing power will be transferred from businesses where labor has been squeezing the max possible out to the minimum wage firms where labor has been squeezing the least. IOW, the CBO has been worried about the wrong 500,000 jobs. 🙂
* * * * * *
But, given my portrayal (yesterday — see reprint at bottom of this comment) of the poverty level wages earned by very expensively educated and many long years trained airline pilots — maybe half the rigorously rated pilots in the country — it is difficult to imagine just where labor has been squeezing the most; more practicably maybe where it has been squeezed the least (until it’s their turn).
Right now the top 1% of incomes takes 23%. The top 20% take 50%. So the next to top 19% are doing “okay” (for the time being). The bottom 20% OTH are taking 2%. A $15 an hour minimum wage would directly raise the wages of the bottom 45% of wage earners (not the same as bottom 45% of income — but must be somewhere around).
Just to get all the numbers down. These numbers are only going to get worse, not better — as the squeeze on de-unionized American labor goes on, and on. Two additional steps are going to be needed to reform America. The first obviously is re-unionization (I forever scream “legally mandate, centralized bargaining”).
The second, which I am becoming aware of lately, may be huge taxation of huge incomes — and huge estates. Apparently, this was accomplished during both world wars and the country was a better country for as long as it lasted afterwards. This looks like the only way to disrupt the aggregation of monopoly power — which floods over into the political forum, and floods out everyone else as we are seeing day to day.
American (for a while longer) leads the world; if the rest of the world followed with huge taxation it might make the whole world a lot better place. (No communist here; I’m one of the few people who will tell you how we really won the Vietnam war and then threw it all away because we wouldn’t even give the South the money to finish the job — and what a vicious monster Ho was).
Woops! I inadvertently hit the POST button while still writing. Here’s is yesterday’s airline pilot part — today I am reading how airlines don’t own plane anymore, just lease, how they are outsourcing maintenance overseas and contracting out for other (un-unionized) employees.
Better get re-unionized in a hurry folks (legally mandated, centralized bargaining only way) while there is anybody left to organize.
[CUT AND PASTE]
I always wanted to be a pilot (too late now). I’ve been reading “Cockpit Confidential” lately. Without getting into the details of all the years of schooling and hours of experience and money in advance it takes to get into the cockpit of even a regional jet — it may take $100,000 up front and until you are 35 years old to get into a regional — and guess what?
You are making $500 to $600 a hard week — and you are probably going nowhere better. There are (I could have this wrong but it’s ballpark) about as many regional as major airline jobs.
If all that training and time can down our exploitative labor market drain, how is anybody else ever going to make money …
if American labor does not completely re-unionize …
.. and the only method of unionization that can possibly work in this day of the balls to the wall corporate bean counters is legally mandated, centralized bargaining. The only way to restore political democracy too.
Last minute thought: if low labor wages are lowering “effective demand” Edward Lambert is forever trying to explain, then …
… even a teeny-tiny minimum wage raise to most of a dollar less than Lyndon Johnson’s minimum …
.. we are more likely to ADD 500,000 jobs!
To accept that an increase in the minimum wage, or any wage for that matter, will cause a loss of jobs is to suggest that there are workers hired and paid to fill jobs that are unnecessary. Does that sound like corporate America? Does that sound like any employment in America, that workers are doing jobs that are not needed by their employers and being paid to do so. In an economy within which there is now persistently high levels of unemployment how can it be plausible that there are enough employers paying unneeded workers such that if wages are required to be increased those workers will suddenly not be needed? That is an untenable concept.
Thanks for this. I have posted on this a number of times under variations of “The Jimmy the Stockboy Fallacy” here at AB.
Bottom line: employers see labor costs as an input to be reduced. And the simple result is that they not only don’t care about job loss at the individual enterprise level but actively seek it.
Yet they insist that any and all efforts to increase employee cost via increasing compensation be opposed by individual enterprise level employees not on the basis that there would be an overall loss or even a zero sum outcome but simply that it would mean ‘Poor Jimmy the Stockboy’ losing his job. Even if cutting a new deal with Staples for JIT delivery of stock supplies would have THEM eliminating Jimmy’s job tomorrow.
You see this time and again: economic conservatives playing the Mother Theresa card “don’t you Libs care about the poorest among us” in an attempt to get WORKERS to embrace ‘shared sacrifice’ even as they (in accordance with their central economic philosophy) ‘maximize return’.
Employers maximizing their total take from productivity by actively eliminating jobs: Freedom And Capitalism!
Employees maximizing (or even increasing on net) their total take from productivity even if it costs an employee (yet still increases their gross and net): Poor Jimmy You Heartless Bastards!
Cynicism only begins to touch this. Try Sociopathic Dishonesty.
I don’t know if you are aware, this guy Kahnemann, did some work, people are risk averse
in other words, logical analysis never wins over emotional arguments like 500,000 jobs lost
or, if you havn’t noticed lee atwater and p noonan and k rove creamed logical Democrats
Ezra Abrams
Kahnemann and Tversky showed that people’s intuition about probability is usually wrong as compared to what a statistician would say. I thought they were being too hard on people at the time, but have come to understand them better. Ordinary people, including “experts” outside their own field, don’t think very clearly. That has something to do with the biological if not physical limits of what a brain can do in “real time,” and the need to make decisions in a world where the dangers tend to be mostly obvious and it pays to be “risk averse.” Unfortunately it also pays, in the short run, to be short sighted and greedy.
I wouldn’t claim that Democrats are more “logical” than Republicans. But for a long time they had a winning argument based on the superior results of New Deal policies as compared to those that came before (law of the jungle capitalism) and will now come after, those with actual experience of the difference being mostly dead.
Meanwhile I need to add that Elmendorf and his CBO are no longer bi-partisan, except in the new days’ sense where “bi partisan” means “paid for by Peter Peterson.”
I guess I’ll add this too:
“Economists” who talk in public are ALWAYS outside their own field. Economists know something about the pure mathematics of models they call “economics,” and they know something about the opinions of other people called “economists,” but they know no more about the real world than you and I.
Dale on your previous: there is a difference between ‘bi-partisan’ and ‘non-partisan’ and CBO is ostensibly the latter. And by nature a ‘non-partisan’ office designed to estimate budget impacts on policy is bound to be conservative (in its old-timey sense) in its approach. After all even a Democratic leaning big hearted CBO’s Director’s main job is to ask Congress the following question:
“Senator? Mr. Ms. Congressperson? Are you really aware that your new program X projects to cost Y Gazillion dollars and have impact Z on whatever? You are? Okay good, just checking!”
Elmendorf is an odd bird in some ways, as is his predecessor Alice Rivlin (1st CBO Director and bound at the hip to Peterson’s boy former GAO Director David Walker)., but it may be as simple as seeing them through the lens of my current area of study: Cost Accounting. In general you pay accountants to design methods that allow bookkeepers to track expenses and costs to the penny which in turn allows that accountant to present financial reports to management detailing how they can control those costs and maximize retained earnings. And it would be the rare accountant indeed whose advice would tend towards: “Shoot throw a couple more billion at R&D and boost givebacks (dividends) to shareholders!! Hey it’s just money!!!!”.
That certainly is not how my Accounting Professor is teaching me to think in my new field of study. And as for Elmendorf personally, if you took him and put on green eyeshades, a fountain pen in his hand, an old fashioned ledger in front of him, and he on a high stool in a Dickensian Counting House the image couldn’t be more fitting and natural.
I mean can you even look at Doug E or for that matter Alice R and imagine either ‘living LARGE!!’. Well no, that is why we call them ‘beancounters’ and not ‘Moet et Chandon cork counters’.
Elmendorf always drove me CRAZY, because the most obvious reading is ‘Peterson shill’ and he was always willing to lend support to the enemies of my favorite policy proposals. On the other hand much of the explanation for Doug might just be ‘dried stick cost control accountant Elmendorf testified yesterday—‘. It just turns out that such tend to put their thumbs on the scales in a way helpful to owner-plutocrats.
Bruce
the Peterson paid experts like to call themselves “non partisan experts.” bi partisan may or may not be what CBO is always called, but one of your favorite phony fixes for SS was a “bi partisan” fix. i was just making the point that bi partisand and non partisan may not mean what we used to think they mean.
and elmendorf does seem to be associated with a turn from reports that were generally more “low cost” than the Trustees to milking the “high cost” possibilities.
i wouldn’t try to guess who and how they put their thumb on the scale, but i have gone from thinking the Trustees… at least their actuaries… as mostly honest if you got behind the scary rhetoric to maybe not so honest, as when they predict that future workers will take their higher standard of living in the form of more time off, leaving less income for SS to tax. no chance, i guess, that those future workers would be smart enough to want to take their higher standard of living time off in the form of an actual retirement outside of the rest home.
i think Adolf Eichman was famous for being a bit colorless.
and the thing that frosts me is that everyone seems to forget that the “costs”they are trying to control are the costs of paying for the cost of living when you get old… a cost you can pay for yourself, easily, if they will only let you.
the damn thing is evil. banal evil perhaps. just stupid perhaps. but a banal evil stupidity/