Congressional Budget Office Misses the Mark on Minimum Wage

Raising the minimum wage is essential to decreasing income inequality and raising the living standards of economically marginalized Americans who are disproportionately women and people of color.

By Imara Jones Feb 20, 2014

Earlier this week the fight for the minimum wage suffered its greatest setback since President Obama swung behind the idea last year. The Congressional Budget Office (CBO)–the nonpartisan research arm of the United States Congress–issued a report that said that increasing the minimum wage to $10.10 an hour could eliminate [PDF] hundreds of thousands of jobs. Not surprisingly both the press and political leaders seized on the news. An Associated Press headline proclaimed "Democrats on defensive after Congress’ budget analysts pin job losses to minimum wage increase."

In turn, Senate Minority Leader Mitch McConnell (R-Ky.) said that the report "spelled dire consequences" that would lead to "fewer jobs" and "less opportunity." The problem is that these conclusions are way off the mark, and wrong conclusions could lead to the wrong answer of not raising the minimum wage.

Increasing the minimum wage is so pivotal because wages overall are at their lowest level in more than 40 years even as corporate profits are higher than they’ve been in 60 years, and 90 percent of the increase in wealth since 2000 has gone to the top 1 percent. This collapse in income hits struggling Americans particularly hard, and is a leading reason why half of all Americans are either in poverty or one paycheck away from an economic crisis. The tremendous pressure that all of this places on historically marginalized communities can be traced back to the stagnation of the minimum wage which, adjusted for inflation, is the lowest since 1968.

In fact, raising the minimum wage is essential to decreasing income inequality and raising the living standards of economically marginalized Americans who are disproportionately women and people of color. The nonpartisan Center for Budget and Policy Priorities concludes that most of the growing inequality "between middle- and low-wage women reflects the erosion in the value of the minimum wage." As the Economic Policy Institute lays out, six out of 10 of those benefiting from the minimum wage are women. Four out of 10 are either black or Latino, higher than than the proportion of African-Americans and Latinos in the general population. When its all said and done, close to 20 million Americans would see an increase in pay and up to eight million people could be lifted out of the poverty. Over half of the benefits of the increase would flow to families living on less than $40,000 a year.

These facts about the minimum wage are not contested by the CBO report. Actually, on poverty, the CBO agrees with the conclusion that a minimum wage hike would lift families out of poverty to the tune of $5 billion a year. But where the CBO’s analysis goes off the rails is on its assumption that an increase would lead to the loss of 500,000 jobs.

Assumptions versus facts

The CBO’s jobs loss analysis runs into trouble in a few places and misses a broader point.

First CBO’s forecast is out out of step with over 60 independent studies that say that the minimum wage has very little impact on joblessness. Raising the minimum wage neither noticeably helps create nor undermines the number of jobs available. That’s why Senator Tom Harkin (D-Iowa), sponsor of the minimum wage bill in Congress’ Upper Chamber, called the job loss estimate a "myth." Seven Nobel prize winning economists agree with him. For example, 2011 Nobel prize winner Christopher Sims told Bloomberg that there is "very small, if any, negative effects on employment." Even CBO itself estimates that job losses could range anywhere from 1 million to zero. Therefore, the setback for the minimum wage effort posed by the report is possibly more one of perception than fact.

But there’s another way which job-killing analysis may be in error. Much of economic analysis, including the CBO report, is based upon assumptions about the future rather than an actual knowledge of it. That’s why economics is a social science rather than an actual one. Many predictions are based upon reasonable guesses about the time ahead which can easily be wrong. The CBO assumptions in the report stray into this fuzzier territory.

The key assumption by the CBO report is that the $10.10 minimum wage hike is so different in nature that all of the hard evidence gathered over the country’s 40-year experience with other minimum wage hikes doesn’t apply and should be laid to the side. Among the two elements that they cite make this hike unique are that: 1) its a relatively large increase at close to 50 percent above the current minimum wage and 2) will go up every year as prices increase due to the fact that–for the first time in history– it will be tied to the annual inflation rate.

The CBO says that the differences proposed in this minimum wage are so new that it has to "simulate" what their impact will be, because companies large and small have never had to contend with them. But by their own estimate "simulation" rather than using America’s actual history with the minimum wage leads to different conclusions about what actual jobs losses might be. That’s why the CBO conclusions are so different than dozens of other studies.

It’s important to note that there’s nothing inherently flawed about the CBO’s data or methodology. But what is open to debate is whether its assumptions about the minimum wage are accurate given all of the available evidence. There’s a strong argument to be made that it’s not.

All of these twists and turns over numbers and assumptions can be confusing but they actually lead to the pivotal factor in all of this. The truth is that the moral and economic questions at stake in whether America raises its minimum wage are too big to be left to statisticians and their spreadsheets. They go to the very essence of what America is all about and what we consider to be bedrock economic rights and wrongs. And the answer to these questions can’t be answered by econometrics. They actually have to answered by all of us.