Raising the Minimum Wage: CBO Weighs in

Raising the Minimum Wage: CBO Weighs in

Timothy Taylor 11/07/2019 6

No proposal to raise the minimum wage can be evaluated without asking "how fast and by how much?" The Congressional Budget Office offers an evaluation of three alternatives in "The Effects on Employment and Family Income of Increasing the Federal Minimum Wage" (July 2019). CBO considers three proposals: "The options would raise the minimum wage to $15, $12, and $10, respectively, in six steps between January 1, 2020, and January 1, 2025. Under the $15 option, the minimum wage would then be indexed to median hourly wages; under the $12 and $10 options, it would not." (There are some other complexities involving possible subminimum wages for teenage workers, tipped worker, and disables workers, which I won't discuss here.)

One way to understand the result is to compare these proposals with the path of wages in the US economy. The top dashed line shows the (adjusted for inflation) wages of workers at the 25th percentile of the wage distribution. The second dashed line shows the wages of workers at the 10th percentile of the wage distribution. The orange line shows the federal minimum wage under current law, both past and present. The three proposals for raising the minimum wage appear on the far right-hand side of the figure.


An obvious takeaway here is that the minimum wage was roughly equal to the 10th percentile of the income distribution in the 1970s. While the minimum wage has fallen below the 10th percentile since then, it almost rises back to that level after the series of minimum wage increases enacted in 2007. However, the minimum wage has been separating from the 10th percentile wage, and the gap is projected to keep growing under current law.

This general background suggests that in a big picture sense, the consequences of having a minimum wage that rises to, say, $12 per hour, won't be all that different from the past consequences of having a minimum wage that's a little below the 10th percentile of wages. However, an increase up to $15/hour in the federal minimum wage would potentially have a greater effect, outside the historical norm.

Considering the effects of a higher federal minimum wage is also complicated by the fact that so many states and cities have already enacted higher minimum wages. The CBO notes:

As of 2019, 29 states and the District of Columbia have a minimum wage higher than the federal minimum. (Many of those states have boosted their minimum wage in recent years.) The minimum wage is indexed to inflation in 17 of those states, and future increases have been mandated in 6 more. Some localities also have minimum wages higher than the applicable state or federal minimum wage; in San Francisco, for instance, the minimum wage increased to $15.59 per hour as of July 1, 2019, and is adjusted for inflation annually. About 60 percent of all workers currently live in states where the applicable minimum wage is more than $7.25 per hour. And in 2025, about 30 percent of workers will live in states with a minimum wage of $15 or higher, CBO estimates ...

Because of all this state and local activity with higher minimum wages, the argument raising the  federal wage has shifted. It's not as much about a minimum wage for all US workers, as it is about a higher minimum wage for the 40% of US workers where that hasn't already happened. And often, those workers live in lower-wage places where the combined forces of politics and economics haven't yet led to a higher minimum wage.

For illustration, here's are estimates of what percentage of workers would be directly affected by a rise in the minimum wage. Past increases in the minimum wage have typically had a directt effect on 5% of workers or less, and an increase in the federal minimum wage to $10/hour or $12/hour fits in this range, while an increase to $15/hour would be a much larger step. (The hollow circles refer to increases in the minimum wage that were proposed back in 2014 to happen in 2016, but didn't actually take place.)


The effects of a higher minimum wage on employment and wages are affected by lots of factors, including all the ways that employers and worker might react to to such an increase in the short-run and the long run, not just through hiring, but also through decisions related to pricing of products and investment in equipment. There are lots of uncertainties in modelling minimum wage increases. CBO did a review of 11 recent studies, finding some that predict a minimum wage will increase employment while others predict it will decrease employment. Here's a table of the studies, for readers who would like to dig deeper. The elasticity is by how much employment for those directly affected by the minimum wage will change in response to a change in wages of 1% caused by the higher minimum wage. In most studies, but not all, the long-run effect is larger than the short-run effect. 

With these uncertainties duly recognized, here the CBO estimate for a phased-in rise in the minimum wage to $15/hour: 

Under the first option [of raising the minimum wage to $15/hour] according to CBO’s median estimate, about 1.3 million workers who would otherwise be employed would be jobless in an average week in 2025. That decrease would account for 0.8 percent of all workers and 7 percent of directly affected workers who would otherwise earn less than $15 per hour. Wages would rise, however, for 17 million directly affected workers who remained employed and for many of the 10 million potentially affected workers whose wages would otherwise fall slightly above $15 per hour—specifically, between the new federal minimum and that amount plus 50 percent of the increase in their applicable minimum wage. The higher wages for those potentially affected workers might lead to reductions in their employment, but some firms might hire more of those workers as substitutes for lower-paid workers whose wages had increased by larger amounts. Those two factors would roughly offset for those higher-wage workers, CBO anticipates. 

The $15 option would alter employment more for some groups than for others. Almost 50 percent of the newly jobless workers in a given week—600,000 of 1.3 million—would be teenagers (some of whom would live in families with income well above the poverty threshold). Employment would also fall disproportionately among part-time workers and adults without a high school diploma. ...

That net effect is due to the combination of factors described above:

  • Real earnings for workers while they remained employed would increase by $64 billion,
  • Real earnings for workers while they were jobless would decrease by $20 billion,
  • Real income for business owners would decrease by $14 billion, and
  • Real income for consumers would decrease by $39 billion.

My own quick take is that an increase in the federal minimum wage to $10/hour or even $12/hour is well within the range of past experience, and the effects are likely to be relatively small. Going to $15/hour is a bigger jump.

In particular, there are states and big parts of the country outside of major metropolitan areas where quite a large share of workers make less than $15/hour. Here are some comparisons from Census Bureau data. In May 2018, for example, the median hourly wage in California as a whole was $20.40. However, the median wage in the San Francisco-Oakland-Hayward metro area was $26/hour, while in the Fresno area the median wage was $16.40/hour. Or if one looks across states, the median hourly wage in Mississippi is $14.70/hour, or in Idaho was $16.47/hour. With a very large and diverse US economy, the effects of a higher federal minimum wage will not be evenly distributed by geography. 

A version of this article first appeared on Conversable Economist

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  • Ian Russell

    This issue is timely

  • Donna Berisso

    Raising the minimum wage is noble and commendable

  • Megan Kehoe

    People may not like but raising the minimum wage has a number of serious and negative unintended consequences.

  • Laura Anderson

    Employers will be disproportionately hurt by the extra costs incurred.

  • Monica Sweeney

    Large corporations with big budgets will weigh the increased labor costs and elect to invest in technology to displace workers.

  • Paul O'Beefy

    It's easier and less expensive to have artificial intelligence take over.

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Timothy Taylor

Global Economy Guru

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

   

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