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- The Congressional Budget Office has released a report examining the economic consequences of raising the US federal minimum wage to $15 an hour.
- The report estimated that such a move would raise the wages for just over 27 million workers while eliminating 1.3 million jobs.
- Looking at the details of the report and other research, the $15-an-hour minimum wage makes sense.
- Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities. Bernstein served as the chief economist and economic adviser to Vice President Joe Biden.
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Every time a new, high-visibility report on the minimum wage is released, the usual forces for and against the policy go into their usual crouches. Those advocating on behalf of low-wage workers stress the benefits of a proposal to raise the wage floor. Those who represent the labor costs of low-wage employers stress the costs of such proposals, arguing that such policy would force their clients to lay off workers.
This pattern played out like clockwork when the Congressional Budget Office released a report earlier this month estimating the effects that raising the federal minimum wage might have. The report offered rich pickings to both sides in the debate.
Ben Zipperer of the liberal Economic Policy Institute argued that the "main takeaway" from the report was that increasing the national wage floor from its current level of $7.25 to $15 by 2025 "would raise wages of up to 27.3 million low-wage workers, decrease income inequality, and reduce the number of families in poverty by 1.3 million." My own take was similar.
Opponents, like the National Restaurant Association, took quite a different lesson from the report, tweeting out that raising the federal wage floor to $15 "could trigger elimination of as many of 3.7 million jobs."
Imagine you’re a policymaker trying to figure out where you stand on this proposal. What should you make of the CBO’s findings? Is its report essentially saying: "Hey, some workers will get helped by a $15 minimum wage, some will get hurt. Good luck and have a nice day."
In fact, we can do better than this, and I say that as an empirical economist, not as an advocate. While both sides will find fodder for their ideas in the CBO report, the balance of the evidence makes a strong case for increasing the minimum wage to $15 an hour.
Let’s be clear about the consequences
First, we should recognize that the restaurant association’s use of 3.7 million jobs lost reveals a fat thumb on the scale. The CBO was clear that its central job-loss estimate was less than half of that: 1.3 million. Because such estimates are inherently uncertain, the budget office wisely gave a range of zero to 3.7 million. To solely report the top of the range (or, for that matter, the bottom) is to reveal your bias.
Second, whenever a policy analysis like this suggests an "unintended consequence," it’s necessary to compare the numbers. There are no wage policies that don’t hurt somebody.
Consider, for example, an analysis of a minimum-wage increase that showed zero job losses. Some of those higher wages would come out of profits, which is what the CBO found and what the restaurant lobby doesn’t like.
In this case, the CBO estimated that an increase phased up to $15 an hour by 2025 would directly lift the earnings of 17 million workers and indirectly boost the pay of another 10.3 million (who already earned above the new minimum but whose employers would choose to give them an extra bump to at least partially maintain their relative position). As noted, 1.3 million would become jobless under the CBO’s estimates.
In other words, over 95% of workers affected by the change would get a pay increase. Moreover, as Zipperer noted, affected workers on average could expect to see their annual earnings go up by more than $1,500.
But does the fact that 21 times as many workers are predicted to be helped as hurt by the proposal put it over the top? That’s persuasive, but it’s not dispositive. What if the magnitude of the losses to the relatively few losers is comparable to the gains of the winners?
The CBO underweights recent findings
It is here that the picture painted by the CBO report is incomplete. As the economist Heidi Shierholz of the Economic Policy Institute has pointed out, there is a lot of turnover in the low-wage labor market. "Each quarter, more than 20% of the lowest-wage workers leave or start a job," she said after the CBO released its new report.
This suggests some workers who initially lose their job because of the higher wage will eventually find work at a higher entry-level wage (because of the increase). Some of these workers may even come out with higher annual earnings if the higher hourly wage more than offsets their fewer annual hours.
But the bigger shortcoming with the CBO’s report is that it fails to adequately weight a set of recent studies that suggest its job-loss estimate is too high. The CBO writes that many studies "have found little or no effect of minimum wages on employment, but many others have found substantial reductions in employment."
But the minimum-wage literature of the past decade is not nearly so balanced. True, there are studies that find job losses of the magnitude that the CBO predicts. But the increasing weight of the evidence pushes the other way, toward much less displacement. As Shierholz said, "CBO’s assessment of the literature has simply not yet caught up."
That’s true, but it’s not necessarily the CBO’s fault. It has a very high bar, as it should, for incorporating "new" information. The latest generation of minimum-wage research is slowly but surely changing the conventional wisdom, but that takes a long time in economics. As the Nobel laureate Paul Samuelson said, "Inexact sciences like economics advance funeral by funeral."
Policymakers, however, do not have time to wait for such plodding advances. They need to act based on the best, most up-to-date information. When we consider the CBO’s findings in that light, there’s a strong case for phasing in a $15 federal minimum wage by 2025.
Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities. Bernstein served as the chief economist and economic adviser to Vice President Joe Biden, as the executive director of the White House Task Force on the Middle Class, and as a member of President Barack Obama’s economic team.
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