Would raising the minimum wage lead to fewer jobs?
Updated at 4:00 p.m.
A new Congressional Budget Office (CBO) report out Tuesday indicates an increase in the minimum wage could put half a million people out of work even as it lifts hundreds of thousands of others out of poverty.
The report from the nonpartisan CBO examines a proposal favored by President Obama and the congressional Democrats to increase the minimum wage to $10.10 an hour from the current rate of $7.25 in three steps. It’s a top issue for Democrats, especially with the 2014 midterm elections looming: the president has already acted by executive order to lift the minimum wage for federal contractors to $10.10, and House Democrats will try to use a procedural measure to force a vote on a wage bill in the coming weeks.
The CBO estimates that hiking the minimum wage by nearly $3 would effect about 16.5 million people. It would reduce employment by about 500,000 workers, but at the same time, about 900,000 of the roughly 45 million Americans who live below the poverty threshold would be lifted above it. The total earnings increase for low-wage workers would be about $31 billion, with 19 percent of that going to families earning below the poverty threshold.
The effect on the federal budget would “probably be a small decrease in budget deficits for several years but a small increase in budget deficits thereafter,” the report concludes.
Republicans have argued that a minimum wage increase will cost jobs, and are viewing this report as their validation.
“This report confirms what we’ve long known: while helping some, mandating higher wages has real costs, including fewer people working. With unemployment Americans’ top concern, our focus should be creating – not destroying – jobs for those who need them most,” said Brendan Buck, a spokesman for House Speaker John Boehner, R-Ohio.
The CBO also considered an increase in the minimum wage to $9.00 per hour, which would only reduce employment by an estimated 100,000 workers. Earnings would increase by just $9 billion, with 22 percent of that sum going to families making below the poverty threshold.
The White House challenged the report by saying it doesn't reflect "the overall consensus view of economists which is that raising the minimum wage has little or no negative effect on employment." In a blog post, Council of Economic Advisers Chairman Jason Furman and Betsey Stevenson, one of the council members, cite Nobel Prize winners and hundreds of other economists they say have argued that there would be no negative employment effects if the minimum wage were higher.
Furthermore, the Furman and Stevenson argue, the report ignores any potential gains in productivity that companies would see like lower turnover and improved motivation, morale, focus and health. And they write that companies could also adjust by reducing profit margins.
Republicans quickly fired back by citing another study from economists David Neumark and William Wascher who found that in 100 different studies, two-thirds of researchers reported a negative effect on employment if the minimum wage were increased.