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Home / Jared Bernstein: On the economy / More evidence–this time from CBO–that higher (even much higher) minimum wages largely do what they’re supposed to do.

More evidence–this time from CBO–that higher (even much higher) minimum wages largely do what they’re supposed to do.

Summary:
Raising the federal minimum wage to per hour by 2025 would lift the pay of 27.3 million workers—17 percent of the workforce—according to a new report from the Congressional Budget Office. It would raise the incomes of poor families by 5 percent and thus reduce the number of people in poverty by 1.3 million. Since these low-end gains would be partially financed out of profits, the increase in the wage floor would reduce inequality. CBO also estimates that “1.3 million workers who would otherwise be employed would be jobless in an average week in 2025.” Because economists’ estimates of the job-loss effects from minimum wage increase are so wide-ranging—some studies find little-to-no job loss impacts; other find more—CBO estimates that there’s a two-thirds chance that the actual change in

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Raising the federal minimum wage to $15 per hour by 2025 would lift the pay of 27.3 million workers—17 percent of the workforce—according to a new report from the Congressional Budget Office. It would raise the incomes of poor families by 5 percent and thus reduce the number of people in poverty by 1.3 million. Since these low-end gains would be partially financed out of profits, the increase in the wage floor would reduce inequality.

CBO also estimates that “1.3 million workers who would otherwise be employed would be jobless in an average week in 2025.” Because economists’ estimates of the job-loss effects from minimum wage increase are so wide-ranging—some studies find little-to-no job loss impacts; other find more—CBO estimates that there’s a two-thirds chance that the actual change in employment is between 0 and -3.7 million. Interestingly, -1.3 million is not the midpoint between 0 and -3.7, suggesting the budget office gave a bit more weight to studies finding less evidence of job-loss effects.

Thus spoke Zarathustra the CBO. Should this lead objective policy makers to embrace or eschew the policy to increase the federal minimum wage to $15 in 2025 (assume for this exercise that “objective policy makers” exist)?

I’d give a solid push towards embrace. It’s a progressive policy that’s long been shown to largely hit its goals of boosting the earnings of low-wage workers whose families seriously need the income. Yes, the report warns that some will be hurt by the increase, but the best research suggests their job-loss estimate may be too high. Moreover, even if they’re right, the ratio of helped-to-hurt is 21 (27.3m/1.3m). And given the extent of turnover in the low-wage labor market, many of those 1.3 million workers will eventually find new jobs, jobs which pay a lot better than their old ones.

Full disclosure: I’ve long advocated for minimum wage increases, so my “embrace” won’t surprise those who’ve followed that work. But the reason why I—and, more importantly, progressive institutions like the Economic Policy Institute, CBPP, CAP, and many others—have long advocated for minimum wage increases is that a deep body of uniquely high-quality research finds that prior increases have had their intended effects of raising low-wage workers’ incomes without leading to significant job loss.

But isn’t the $15 minimum wage a lot more ambitious than prior increases (the CBO report also simulates $10 and $12 increases)? It is, and as such, it will have a much larger “bite” than prior increases, meaning it will apply to a larger share of low-wage workers than past increases. Figure 4 in the report shows that the 1991 increase directly affected about 6 percent of workers; this one could affect almost 14 percent.

To evaluate this concern, go back to my comment about “uniquely high-quality research.” By that I mean that because so many states and cities have implemented higher wage floors on their own—there are over 130 such cases over the last few decades—researchers have been able to conduct many more experimental-type studies than in virtually any other area of economics, comparing outcomes in places that raised their wage floor to outcomes in places that did not. Moreover, some of these increases have had comparable bites to the $15 wage simulated by CBO, as shown by this new paper by Godoey and Reich.

The importance of this new report relative to today’s CBO release is that G&R focus especially on high-impact (large bite) increases. They find “positive wage effects but do not detect adverse effects on employment, weekly hours or annual weeks worked. We do not find negative employment effects among women, blacks and/or Hispanics. We do find substantial declines in household and child poverty.”

No single study will end this debate, but as someone who’s been in this debate for about 30 years, believe me: especially since the path-breaking work of the late (man, that’s still painful to write) Alan Krueger and David Card, the evidence from this sort of controlled study has changed many economists’ and policy makers’ views on minimum wages.

The simple, classical model—raise pay by mandate and everyone affected gets hurt—is clearly wrong, as the CBO report shows. Just how wrong is it is something we’ll continue to argue about. But in the meantime, policy makers who want to improve the living standards of low-wage workers, reduce poverty, and push back on inequality can rest assured that, as the budget office’s new report shows, the evidence is on their side. The benefits of the increase—even a significant increase like this one—far outweigh the costs.

Jared Bernstein
Jared Bernstein joined the Center on Budget and Policy Priorities in May 2011 as a Senior Fellow. From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, Executive Director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team. Prior to joining the Obama administration, Bernstein was a senior economist and the director of the Living Standards Program at the Economic Policy Institute, and between 1995 and 1996, he held the post of Deputy Chief Economist at the U.S. Department of Labor.

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