The CBO’s New Report on the Minimum Wage

The Congressional Budget Office released a report today on the impacts of increasing the federal minimum wage, as Democrats are agitating to do. A technical analysis of the report’s conclusions is far beyond my competence, but no doubt economists will be weighing in over the days to come. I will simply take the report’s conclusions at face value.

CBO analyzes two different increases in the federal minimum wage, to $10.10 and to $9.00 per hour. As you might imagine, the consequences of each are similar, but more pronounced with the larger increase. So let’s consider the CBO’s projections with regard to the proposed increase to $10.10. The CBO finds that this increase would raise wages, and income, for a substantial number of low-wage workers:

Among the 33 million low-wage workers earning less than $11.50 per hour in the second half of 2016 under current law, CBO estimates, real earnings would increase by $31 billion as a result of higher wages if the $10.10 option was implemented. … About 16.5 million workers who will earn less than $10.10 per hour under current law would receive higher wages, CBO estimates, and some workers who will earn between $10.10 and $11.50 per hour under current law would receive higher wages as well.

A higher minimum wage would have a redistributive effect, the CBO finds, because upper-income Americans would earn less. The bad news about any substantial increase in the minimum wage, of course, is higher unemployment. The CBO projects that increasing the federal minimum wage to $10.10 per hour would cause 500,000 Americans to be unemployed:

Once fully implemented in the second half of 2016, the $10.10 option would reduce total employment by about 500,000 workers, or 0.3 percent, CBO projects.

Note that while the overall increase in unemployment would be 0.3%, the increase among the affected low-wage employees would be much greater. It is noteworthy, too, that 500,000 lost jobs represents the midpoint of a broad band: the CBO acknowledges considerable uncertainty in its predictions, and says that “there is about a two-thirds chance that the effect would be in the range between a very slight reduction in employment and a reduction in employment of 1.0 million workers.”

The Obama administration might cheer the loss of 500,000 jobs as a welcome release from “job lock,” but I doubt that anyone else would take that view. Preventing low-wage earners from finding employment has particularly diabolical consequences. Minimum wage jobs are typically entry-level. Once a person gets an entry-level job, he can work himself up the ladder. But if a person is frustrated from getting that first job by misguided government policies, he could be faced with a lifetime of welfare, crime or dependence. The social costs of preventing hundreds of thousands of Americans from finding entry-level employment are literally incalculable.

Raising the minimum wage always poses that dilemma: yes, it will help some low-income workers (as well as some middle-income families), but it will also impose terrible costs on others. Economic growth requires no such trade-off. When the economy is growing strongly, the minimum wage becomes moot. Employers hire employees because they need them; they promote employees because they need their workers to take on more responsibility to run a growing business; they pay them more to compensate for added responsibilities and to keep them from being lured away by other employers who also have growing businesses. That is the win-win economic climate that free market policies produce. On the other hand, anti-growth policies, such as those that have generally been followed by the Obama administration, produce both high unemployment and stagnant wages. Increasing the minimum wage can never be more than an unsatisfactory, cosmetic solution to the real problem, which is slow or nonexistent economic growth.