To Help Households Survive, Raise the Minimum Wage

The CBO has been making waves recently: first with a report showing that fewer people would work once health insurance was available as a result of Obamacare and most recently in a report on the minimum wage showing that it would indeed “kill” some jobs in the process of providing higher income and earnings for many families. Is the CBO bowing to conservative pressures in Congress in coming up with such findings?

I don’t think so. CBO continues its long tradition of providing nonpartisan and objective syntheses of the research on important policy questions. At the same time, its findings can easily be cherry picked by each side in the debate and its caveats about the huge uncertainty in its estimates are too often set aside. It faces another difficulty: which indirect effects to incorporate into its estimates. Does a higher minimum wage affect the level of overall demand in the economy or reduce the budget deficit as more people become tax payers and are no longer dependent on government benefits? CBO’s latest report attempts to measure the first of these effects but is very vague about the latter, saying only that any effect on the budget deficit would be “small.” Its reluctance to quantify or “score” such savings has a political impact that may matter more than the specific numbers included in its analysis. Finally, CBO makes no recommendations and leaves it to others to decide the policy implications of whatever numbers it produces.

My own reading of the latest CBO report on the effects of raising the minimum wage either to $9 or to $10.10 an hour, phased in between now and 2016, did not change my view that the benefits of a higher minimum far exceed any costs. After all, the number of people whose earnings would increase (16.5 million) far exceeds the number who would lose, or fail to find, a job (500,000). Moreover, the degree of uncertainty about the latter figure is huge, with many economists concluding that the best studies suggest very little if any adverse effects on employment. CBO itself uses the evidence on the effects of a higher minimum on the employment of teenagers and then seems to assume that a proportion of this effect would apply to adults as well. In contrast, some very good studies, such as one by Alan Krueger and David Card, based on comparing changes in employment in fast food restaurants in states with different minimums, suggest CBO’s findings are unduly pessimistic. Of course, the level of the minimum matters. Whether it should be raised from $7.25 to $9.00 or from $7.25 to $10.10 or something else is debatable. The President supports $10.10, a larger percentage increase than most past raises in the minimum. One way to avoid a politically fractious debate every few years would be to automatically adjust the minimum for inflation or establish an independent board to recommend such decisions as some other countries have done.

A better policy than simply raising the wage floor would be to combine a modest increase in the minimum with an extension of the Earned Income Tax Credit. It should be modest because the bigger the increase in the minimum the more likely it will reduce employment. It should be combined with the EITC, because the EITC is better targeted on the poor. That said, the EITC is expensive and does almost nothing for childless workers. Quite apart from the substantive reasons for combining the two policies, the politics of doing so are appealing. Liberals tend to favor increases in the minimum while conservative prefer expansions of the EITC on the grounds that it does not interfere with markets. For these reasons, Quentin Karpilow and I have recommended a hybrid policy in which a higher minimum is combined with a reformed EITC that extends benefits to childless workers. Our estimates, suggest that the budget savings from raising the minimum to $10.10 would be on the order of $10 billion. Whether this is large or small is in the eye of the beholder but it is enough to more than pay for our EITC reforms. The fact that CBO did not explicitly “score” these savings in its recent report may reduce the chances that either of these proposals will ever see the light of day.

The public is overwhelmingly in favor of raising the minimum wage. In a country that values self-sufficiency it doesn’t make sense to pay people less than what it takes for even a very small household to survive.