CBO minimum wage report creates quandary for White House

February 19
min wage cbo

The Congressional Budget Office has done it again.

In the space of two weeks, it has poked major holes in two of President Obama’s signature initiatives.

Ouch.

Here are the details. Earlier this month, the CBO reported that the Affordable Care Act will lead to more than 2 million fewer people working by 2025.  On Tuesday, it released a report showing that raising the minimum wage to $10.10 would cause 500,000 people to lose their jobs over the next two years.

This is bad news because not only has Obama signed an executive order mandating a $10.10 minimum wage for newly-hired federal contractors, but also, many Democrats in Congress supported this initiative through the Fair Minimum Wage Act (H.R. 1010). As Obama said, “It’s the right thing to do.”

In both cases, the nonpartisan official scorekeeper of government policies appears to have done the equivalent of putting a knife into Obama’s chief priority — getting people back to work.

The problem is not just that 10.2 million people are unemployed and that 3.6 million people haven’t worked in at least six months. It’s also that more than 800,000 workers are so discouraged that they have stopped looking for a job, and that the recovery, which began almost five years ago, is called a “jobless” recovery — or, what some economists call “the persistence of unemployment” — because the American job machine seems to have stalled.

All of the news in the CBO report isn’t bad. In the minimum wage report, the CBO pointed out that paying people more — $10.10 an hour is a significant increase from today’s $7.25 federal minimum wage — and will raise the income of 16.5 million workers and help lift almost a million people out of poverty.

Requiring companies to pay their workers more, however, will also lead some of them to hire fewer people. That’s basic economics. Unless companies are completely insensitive to their labor costs, if wages go up, then the number of workers they’ll hire goes down.

The calculations are simple. If a company has 100 full-time employees who make $7.25 an hour each, the company’s annual wage costs are about $1.5 million. If the company now has to pay its employees $10.10 an hour, it can keep its wage bill constant only if it reduces its workforce to about 72 full-time employees. (Employers could also keep their wage bill constant by reducing the hours of each worker.)

That’s the logic behind the estimate of half a million job losses caused by increasing the federal minimum wage rate. (The CBO wasn’t as precise as the 500,000 sounds. It estimated a range of very slight job decrease to 1 million lost jobs. 500,000 is the central point. The exact amount of jobs lost depends on how sensitive employers are to the wage rate. In addition, 500,000 jobs is a small fraction of the more than 145 million employees in the U.S. work force.)

The upshot of the CBO report: Companies will hire fewer workers if they have to increase the pay for each worker they employ.

So, who will be the lucky ones who may see a nearly 40 percent increase in their wages, and who will be the unlucky ones who may lose their jobs?

The CBO doesn’t put a human face on the people who make minimum wage and who might lose their job.

But the National Women’s Law Center does.

According to their estimates, more than three-quarters of the workers in the 10 largest low-wage occupations are women. These occupations include hand packers and packagers, food preparation workers, waitresses, retail cashiers, personal care aides and childcare workers. On the whole, payrolls in retail trade — where the median annual wage was just over $20,000 in 2010 — fell by 13 percent from December to January. In 2011, the 638,000 women who worked full time as maids and housekeeping cleaners earned about $19,500 a year, according to data from the Department of Labor.

In terms of numbers, more than 2.2 million women, or 64 percent of all workers, earned no more than the federal minimum wage in 2012.

These women may be the ones who benefit and the ones who lose from a mandated increase in the minimum wage.

Geographically, these women are also likely to be working in the southern U.S. states. Florida is the only state in the south where companies must pay more than the current $7.25 federal minimum wage. Oregon, Washington and six other states have a minimum wage of at least $8 an hour, while California plans to raise its minimum wage to $10 by 2016. Four states — Arkansas, Georgia, Minnesota, and Wyoming — have wage requirements below the federal minimum. The National Women’s Law Center estimates that women make up two-thirds of all minimum wage workers in these four states.

While the data show who the minimum wage workers are, the evidence is mixed on whether increasing the minimum wage is a good policy or not.

The president’s Council of Economic Advisers noted that a study from 1994 showed a very small impact on employment when New Jersey raised its minimum wage. The Obama administration also noted that 62 percent of economists said that the benefits of increasing the minimum wage outweigh its costs. That’s good news.

What’s not such good news is that an equal share of that same group of top-notch economists said that raising the minimum wage would reduce jobs as said that it would lead to more jobs.

That’s not surprising at all. Raising wages increases costs for companies that are hiring workers. And, while the increased minimum wage won’t affect companies that already pay more than the minimum wage — think construction, technology, and financial services — it may very well affect those workers at the bottom of the pay scale, who, if the government didn’t provide assistance, would live in poverty

Of course, it’s not clear that minimum-wage employers are living at such thin margins that they can’t afford to pay their workers substantially more than the minimum wage.

Many employers who pay low wages — Wal-Mart is a good example — are doing very well. Wal-Mart’s $469 billion in sales last year put it number one on Forbes list and its $17 billion in profits placed it number 16 on Forbes‘ list of the most profitable companies last year.

In the end, whether raising the minimum wage is a good idea depends on whether increasing the income for 16.5 million outweighs the loss of income for 500,000 workers. The calculus suggests that the benefits do outweigh the costs. Yet, those who lose from this policy may feel that they are being short-changed in this calculation.

Joann Weiner teaches economics at George Washington University. She has written for Bloomberg, Politics Daily, and Tax Analysts and worked as an economist at the U.S. Treasury Department. Follow her on Twitter @DCEcon.
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