This Is the Age of Fairy-Tale Economics
WASHINGTON -- The great virtue of the Congressional Budget Office's recent report on the minimum wage is that it injects a much-needed dose of reality into the debate over job creation. The Obama administration and its congressional allies have taken the position that raising the minimum wage almost 40 percent would have little, if any, adverse effect on jobs. The CBO rejects this view as unlikely. The gap between the administration's claim and plausible outcomes reveals larger inconsistencies in the White House's boast that job creation is a top economic priority.
Under the proposal, the federal minimum wage would go from today's $7.25 to $10.10 by 2016 in three annual steps. Conservatives have argued that this would kill jobs -- if government boosts the cost of labor, employers will buy less of it -- while doing little to reduce poverty. By and large, the CBO report supports this critique. Here are its main conclusions:
-- The higher minimum wage would reduce jobs by about 500,000, or 0.3 percent of projected 2016 employment. The CBO admits that its estimates involve much uncertainty. Job loss, it says, might be as high as 1 million or as low as almost nothing. The half-million figure is its best judgment.
-- Up to 25 million workers would receive wage increases, about 16.5 million below the proposed minimum and possibly another 8 million just above it. Wage increases would raise the incomes of families in poverty by about 3 percent, or $300 annually. The effect is muted because most people in poverty don't have jobs and many low-income workers are part-time (47 percent).
-- Higher incomes would lift about 900,000 people above the government's poverty line in 2016 ($24,100 for a family of four). That's about 2 percent of the projected 45 million poor. The small impact also reflects the fact that many low-income workers, presumably young, come from middle-class families, including 33 percent from families with incomes exceeding three times the poverty line.
An administration serious about job creation has to sacrifice other priorities to achieve it. This, President Obama hasn't done. In another report, the CBO estimated that the health insurance subsidies in the Affordable Care Act (Obamacare) would discourage people from working, resulting in a loss of the equivalent of 2.5 million full-time workers by 2024. The ACA also contains powerful disincentives against hiring low-income workers, by requiring companies to provide their health insurance. The Keystone pipeline is an example of a job-creation project that has been delayed on other grounds.
Choices exist. On some, the White House has voted against job creation. Naturally, it tries to obscure this. Concerning the minimum wage, it predictably assailed the estimated job losses. These don't reflect the "consensus view of economists ... that raising the minimum wage has little or no negative effect on employment," wrote Jason Furman and Betsey Stevenson of the White House Council of Economic Advisers.
How convenient. Conflicts vanish. The decision is a no-brainer. So say the studies.
This is fairy-tale economics. Many studies find negative job effects. The CBO didn't make them up. As important, the CBO shows -- and this is its real contribution -- why many recent studies may not be relevant to today's proposal. The reason: The proposed increase is much "larger than most of the increases that have been studied." Even after inflation, it would likely be about a third. Moreover, the minimum would be indexed to inflation, rising automatically with prices. This, too, is new.
All these differences suggest larger job effects, says the CBO. Cutting jobs involves one-time costs and disruptions that companies may avoid for small increases in the minimum -- but not for big increases. Similarly, more workers would be affected than in the past (about 10 percent of workers compared with 5 percent for increases since 1980). Finally, indexing the minimum to inflation implies a permanence that may inspire firms to make deep cuts in labor costs. Companies won't hire unless new workers are profitable.
Hiking the minimum wage is more compelling as politics than as social policy. The best way to help low-income workers would be to expand the Earned Income Tax Credit (EITC), which is a wage subsidy. This would eliminate hiring disincentives and focus benefits on the poorest workers. But the EITC lacks the minimum wage's political charms. The minimum wage is liberals' symbol for showing how much they care for the poor -- and how much they despise inequality -- while demonstrating conservatives' callousness. Congress gets to dispense pay increases to millions of workers, using private dollars. By contrast, expanding the EITC would require scarce on-budget dollars.
To be sure, weak labor markets still reflect the Great Recession's hangover. But the administration isn't helping. It needs a new spirit: Make jobs, not propaganda.