CBO estimates of job losses caused by minimum wage reflect mainstream economic analysis

Following its estimate of job losses likely to result from lifting the federal minimum wage to $10.10, the Congressional Budget Office is on the receiving end of some none-too-gentle second guessing. For example, from this AP story,

Jason Furman, chairman of the White House’s Council of Economic Advisers, and council member Betsey Stevenson referred in a blog post to a statement by more than 600 economists who cited recent academic findings that “increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labor market.”

“There’s some respectful disagreement on the emphasis and certainty around that magnitude of employment loss,” Furman told reporters of the CBO estimates. He added, “Zero is a perfectly reasonable estimate of the impact of the minimum wage on employment” based on research by other economists.

Rather than zero, CBO estimated a half million jobs would be lost, maybe considerably more. In the Seattle Times, Jim Brunner reports that Sen. Patty Murray and Rep. Suzan DelBene are “unfazed” by the CBO estimate, which they counter by referring to talking points distributed by the Democratic Policy & Communications Center (DPCC). The talking points primarily include citations of research we reviewed in our report on SeaTac Proposition 1. And while economists disagree on the employment effects of modest minimum wage increases, the CBO report is entirely consistent with the dominant view of economists who specialize in this area of research.

Here are some of the relevant observations from our SeaTac analysis (all found in pages 8-11 of the report).

  • An examination of living wage laws in 26 cities confirmed significant negative employment effects. Increasing the living wage by 50 percent, economists found, reduces employment among the lowest wage earners by as much as 2.8 percentage points. (Neumark et al. 2012 27-28)
  • In October 2006, economists David Neumark and William Wascher published a comprehensive review of the literature. After rigorous analysis, they find that 85 percent of the best minimum wage studies “point to negative employment effects” (Neumark and Wascher 2006 121). They conclude,

[T]he oft-stated assertion that the new minimum wage research [Note: the research cited by the DPCC relies heavily on the so-called new minimum wage research] fails to support the traditional view that the minimum wage reduces the employment of low-wage workers is clearly incorrect. Indeed, in our view, the preponderance of the evidence points to disemployment effects.

And, they write, “In contrast, we see very few—if any—cases where a study provides convincing evidence of positive employment effects of minimum wages . .. ”

  • Princeton economist Thomas Leonard, writing on the minimum wage controversy in 2000, says, Card and Krueger say that their ‘strongest and most important finding’ is the absence of disemployment effects from moderate increases in mini-mum wages. The qualifier ‘moderate’ is important. No economist believes that fixing a wage floor at $100 per hour would not create disemployment. (Leonard)
  • Card appears to agree. In a 2006 interview, he said, “I think my research is mischaracterized both by people who propose raising the minimum wage and by people who are opposed to it.”
  •  In response to Seattle venture capitalist Nick Hanauer’s call for a $15 federal minimum wage, Arindrajit Dube, whose research was cited by the White House in support of its proposed increase in the federal minimum wage, told Washington Post columnist Dylan Matthews that there’s no way to estimate the impact. There’s never been a jump that high. The evidence on wage effects, Dube says, is limited to a time period in which the statutory minimum has been “between roughly 35% and 50% of the national median wage” (Matthews). At $15, the minimum wage would be at about 75 percent the national median.
  • Similarly, former U.S. Department of Labor administrator Mark Wilson writes,

The main finding of economic theory and empirical research over the past 70 years is that minimum wage increases tend to reduce employment. The higher the minimum wage relative to competitive-market wage levels, the greater the employment loss that occurs.

  • Increasing the minimum wage also leads to a slowdown in job creation. Jonathan Meer and Jeremy West report that “on average, about one-sixth fewer jobs are created on net for each 10% increase to the minimum wage” (Meer and West 14). In fact, they report The most prominent employment effect of minimum wage laws is a decline in the hiring of new employees. . . . This phenomenon is particularly important given the evidence that min- imum wage jobs often result in relatively rapid transitions to higher- paying jobs. (Meer and West 18)

There’s more, but two things stand out: increases in the minimum wage cause employment decline and the greater the increase the more jobs are lost. One last observation relevant to the DPCC talking points.

That the effects appear muted in some research can be explained most easily by noting that minimum wage increases are typically moderate, imposed incrementally over time.

[Jared] Bernstein offers a good explanation why that occurs.

Richard Freeman, the godfather of labor economics, once told me that one reason minimum wage increases don’t have the job loss effects their opponents predict is because the political process disallows increases that would be large enough to trigger such effects.

Regardless of where you stand on the federal minimum wage hike, it’s clear that the proposals currently under discussion in our state are “large enough” to cost jobs.