Minimum wage hike would cost 500,000 jobs? CBO director defends the estimate.

A number of economists from the White House and beyond have criticized a CBO report on the effects of potentially boosting the minimum wage to $10.10 an hour. But CBO Director Douglas Elmendorf isn’t backing off.

Michael Bonfigli/TCSM
Congressional Budget Office Director Douglas Elmendorf speaks at a Monitor-hosted breakfast for reporters on Wednesday, February 19, 2014 in Washington, DC.

Congressional Budget Office Director Douglas Elmendorf defended a controversial report on the minimum wage Wednesday, amplifying a debate that could affect prospects for one of President Obama’s major legislative goals.

The CBO report said that boosting the minimum wage to $10.10 an hour, as Mr. Obama wants to do, would probably cost jobs – with employment falling by an estimated 500,000 workers.

A number of economists from the White House and beyond criticized the estimate, saying the best research suggests job losses could be negligible, even zero.

Mr. Elmendorf isn’t backing off, however, on the notion that asking employers to pay more for labor will probably mean less hiring.

The CBO analysis is “completely consistent with the latest thinking in the economics profession,” he told reporters at a breakfast organized by The Christian Science Monitor.

Elmendorf said his agency is just doing its job of being a straight shooter on issues that are charged with strong partisan feelings – among economists as well as the general public.

The debate over the impacts of changing the minimum wage is a technical one, but also one that matters to millions of Americans.

According to the CBO’s new analysis, 16.5 million Americans will be earning $10.10 per hour or less as of 2016. A hike in the base-level wage, from a current federal minimum of $7.25 per hour, would also affect perhaps another 10 million workers as employers adjust their overall pay scales upward.

Proponents of the change say it will help millions of low-income Americans get ahead in an economy where gains have been tilted toward the rich. The wage boost, they add, would also have positive effects in the form of higher employee morale and productivity, along with stronger consumer spending due to rising incomes.

In effect, the argument is over whether boosting the minimum wage is an exception to the old maxim that in economics there’s no such thing as a “free lunch.” Under an “exception” scenario, Obama’s proposed boost in the minimum wage might be able to raise US incomes and reduce poverty with little or no cost in jobs.

But that would go against the longstanding theory that when the price of something (like labor) goes up, people (employers in this case) won’t be inclined to buy as much of it.

What makes a “zero job loss” scenario possible? Economists in recent decades have found a pattern of workers being more productive and staying in their jobs longer when the pay is better.

And the wage boost, an idea backed by many Democrats, would help reduce a trend of widening income inequality, Columbia University economist Joseph Stiglitz said in a conference call arranged Tuesday by the Economic Policy Institute.

Elmendorf didn’t disagree on that point. The CBO report estimates that Obama’s proposal could lift some 900,000 Americans above the poverty line and help many more low-income families have more income.

The CBO director also didn’t dispute the possibility that a wage hike would have zero effect on total employment. Where the two sides disagree is on whether that’s the likeliest scenario.

“A balanced reading of the set of research studies in this area led us to conclude that an increase in the minimum wage would probably have a small negative effect on employment, but there was substantial uncertainty around that estimate, as we reported,” Elmendorf said.

The CBO economists came up with a central (likeliest) estimate of 500,000 jobs lost.

“Our responsibility for the Congress is to report the middle of the distribution of possible outcomes.... That's what we've done,” Elmendorf said. The report saw a 67 percent likelihood that the wage boost would result in job losses ranging from very small up to 1 million – in an economy where more than 135 million people now have jobs.

That leaves a one-sixth chance that the job losses could be greater than 1 million and a one-sixth chance the job change could be roughly zero or even positive.

Elmendorf rejected the view that the CBO had strayed from an evolving consensus that the job effects would be minor.

He noted that a year ago, when the University of Chicago surveyed several dozen prominent economists about raising the minimum wage to $9 an hour, as many said the change would make it “noticeably harder” for low-skill workers to find employment as disagreed with that view.

Elmendorf also noted that the federal minimum wage has never been indexed to inflation, as the White House proposal would do. That could give employers a greater incentive to adjust their workforces, he said.

Both the CBO and its critics agree in predicting that overall income in the United States would go up under the proposed wage hike, even after accounting for any job losses.

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