Would a $10.10 minimum wage really cost 500,000 jobs? Obama and CBO at odds.

While the White House disputed the CBO's prediction, the overall evidence in the new report did imply that the benefits of the minimum wage hike – higher income and reduced poverty – may outweigh the costs.

J. Scott Applewhite/AP/File
Boosting the federal minimum wage to $10.10 would increase earnings for more than 16.5 million people by 2016 but also cut employment by roughly 500,000 workers, reported the nonpartisan CBO. Sen. Tom Harkin (D) of Iowa, seen here in November 2013, wrote the Senate legislation and cites other research that argues that a higher minimum wage would create jobs, not reduce them.

The influential Congressional Budget Office – widely viewed as a nonpartisan scorekeeper for US fiscal and economic policy – weighed in on a controversial issue Tuesday, releasing an estimate that raising the minimum wage to $10.10 an hour would cost the nation’s economy 500,000 jobs.

In a nation where adding jobs and reducing unemployment ranks as the top public priority, the estimate of 500,000 lost jobs is a headline-grabbing conclusion. It doesn’t help President Obama sell his proposed hike in the minimum wage.

By Tuesday afternoon, the White House and its allies were pushing back vigorously against the CBO’s job-loss tally.

The sparring over the impact on jobs exposes a real debate on wage policy among economists. Where backers of a $10.10 minimum wage argue that enacting this higher pay rate could happen with little or no loss of jobs, foes argue that a higher minimum means less hiring by businesses.

It’s important not to read too much into the CBO report, however. This isn’t a case of the CBO coming out against Mr. Obama’s plan – for its part, the CBO doesn’t come out for or against specific legislative proposals – or of foiling hopes for a wage hike to pass this year.

Here’s why.

• The overall evidence in the new report by the CBO still implies that the benefits of boosting the minimum wage – higher income and reduced poverty – may outweigh the costs.

• The CBO isn’t widely viewed as the arbiter of broad economic-policy questions (such as the minimum wage) the same way it is on federal budget matters like forecasts of tax revenues or deficits.

• Obama’s proposal wasn’t on any fast track to passage, anyway. Winning over a wary Republican-controlled House in a congressional election year is a heavy lift, with or without help from a CBO study.

In this case, the CBO economists offered a “central estimate” that the US economy would have 500,000 fewer jobs (at a $10.10 minimum wage) than it would with no wage change. The current minimum wage is $7.25 per hour.

If the federal minimum wage were raised to $9 an hour, the CBO’s “central estimate” is for the economy to have 100,000 fewer jobs.

“As with any such estimates, however, the actual losses could be smaller or larger,” the report said. “There is about a two-thirds chance that the effect would be in the range between a very slight reduction in employment and a reduction in employment of 1.0 million workers.”

The CBO reached its conclusion by drawing on an array of mainstream academic studies, not by doing its own original research.

Some economists emphasize that raising the required base wage acts like a tax on labor – creating a disincentive for employers to hire.

A growing number of economists, however, emphasize caveats to this theory.

Jason Furman, chair of the White House Council of Economic Advisors (CEA), invoked this view Tuesday afternoon. He argued that paying low-wage workers more increases their motivation, reduces turnover and absenteeism, and reduces distraction (by removing challenges related to poverty).

“Zero is a perfectly reasonable estimate” of the job impact of Obama’s proposal, Mr. Furman suggested.

That doesn’t mean you could raise the wage to any arbitrary level and see no jobs lost.

Rather, proponents of $10.10 per hour say this shift would be similar in magnitude to past hikes that have resulted in little change to employment.

The CBO report estimated that the nation would have higher overall income (by about $2 billion) with the wage change, even after accounting for the estimate of 500,000 jobs lost. And it would shift income from the rich toward people in poverty or with modest incomes.

“Real income would increase, on net, by $5 billion for families whose income will be below the poverty threshold under current law, boosting their average family income by about 3 percent and moving about 900,000 people, on net, above the poverty threshold,” the CBO said.

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