If this week’s big new report from the Congressional Budget Office is correct, then raising the federal minimum wage to $15 an hour would involve a straightforward tradeoff.
On one side of the ledger, about 1.4 million fewer Americans would be able to find a job, as hiring would become more expensive for businesses. On the other, up to 27 million people would potentially get a raise. Consequently, working-class Americans would take home an extra $333 billion in pay over 10 years, and 900,000 fewer individuals would be in poverty. Some families would end up a bit worse off, but on the whole, America’s low-wage workforce—the grocery store cashiers, nursing home aides, and waiters who’ve been perversely forced to the front lines of the coronavirus crisis while largely being paid a pittance—would be better off.
Democrats asked the CBO, which serves as Capitol Hill’s official fiscal forecaster, to assess the impact of a minimum wage increase, because they are hoping to include one in their party’s upcoming COVID relief bill. The chances of it making the final package were already looking shaky at best; aside from the procedural hurdles to including it, Democrats would need every one of their senators to back it, and West Virginia’s Joe Manchin has said he’s opposed. The numbers churned out by the budget office may not help its chances politically, given that the projection of job losses will give ammunition to the pay bump’s critics. But the overall finding that, on net, low-wage workers end up better off should strengthen the intellectual case for pushing the wage floor higher, especially given how it was produced.
Perhaps the most striking thing about the CBO’s results is that they’re based on very conservative assumptions about how much minimum-wage increases hurt employment—so even for $15-an-hour skeptics, they should provide some reassurance. Economists have argued about this specific topic for decades, and the debate is heated and convoluted enough that the two sides have difficulty even agreeing on basic points about what the vast and growing body of academic literature actually says. Politically progressive researchers will typically tell you that, taken as a whole, the best evidence suggests that hiking the pay floor has a small or negligible impact on jobs. Minimum-wage naysayers will claim that, actually, studies pretty consistently tell us it puts a damper on hiring.
This week, the CBO sided firmly with the naysayers—which one could tell easily enough by how quickly left-leaning economists flamed its results. “We believe that the CBO’s assumptions on the scale of job loss are just wrong and inappropriately inflated relative to what cutting-edge economics literature would indicate,” Heidi Shierholz of the labor-aligned Economic Policy Institute wrote in a Monday blog post that was typical of the blowback. Critics accused the CBO of, among other analytical sins, putting far too much weight on a 2018 paper that showed Seattle’s push for a $15 minimum wage had eliminated a significant number of jobs, even though a followup study by the same team later suggested the impact of the hike was fairly small.
But to really, fully understand just how far the CBO leaned toward the conservative camp on this issue, it helps to know a bit about one crucial technical concept at the center of the whole minimum-wage debate, called an employment elasticity. This is the all-important number that captures how many jobs are supposedly lost when the minimum wage rises. When the elasticity is negative, it means that as pay rises, employment falls; a positive elasticity means the opposite—as pay rises, employment jumps (studies finding those results are fairly rare, but they pop up now and then). If an elasticity is close to 0, it means that employment doesn’t react to the minimum wage much at all.
When analysts try to estimate how many jobs will disappear if the minimum wage increases, their result depends almost entirely on the which elasticity they pick. In a stark and slightly suspicious failure of wonk transparency, the budget office did not actually state outright the number they chose to use anywhere in their report. But based on the results it published, other economists have concluded the budget office went with an elasticity of around -0.48, meaning that for every 10 percent increase in the minimum wage, employment would fall 4.8 percent among workers whose jobs were affected.
That’s a big, fat elasticity, and while some recent studies have suggested that the minimum wage could have an effect that large, they aren’t typical. Just last month, University of California Irvine Professor David Neumark, who is widely considered the dean of minimum-wage critics in academia, released a draft paper in which he compiled the results of three decades of papers in the field. He concluded that, in studies looking at workers directly impacted by minimum wage hikes, the median elasticity was -0.15, less than one third of what the CBO chose. The average was -0.31, only about two thirds of what the CBO ultimately went with.
The CBO offers various technical reasons for why it chose to assume the minimum wage would have such a large impact on jobs, and perhaps it’s not entirely absurd to be cautious: After all, in the states that haven’t already passed higher minimum wages, the climb to $15 would be very steep compared to most minimum-wage hikes in history, and as a result could cause more disruptions for businesses, even if it was implemented gradually over several years. It’s also not an especially surprising move, given who currently runs the CBO. Though the budget office is officially nonpartisan and truly does its best to avoid the political fray, its current head is Phillip Swagel, a Republican former official in the George W. Bush administration who did a stint as a nonresident scholar at the center-right American Enterprise Institute. If you wanted to see a thorough assessment of the $15 minimum wage produced by a moderate conservative skeptic making an effort to at least be somewhat fair, the CBO’s report is more or less it. And what their work shows is that, when you add everything up, the working class likely still comes out ahead. The legislative math might not be right for a big minimum wage hike right now. But it looks like the economic math works well in its favor.
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