Reality Check

Reality Check

Vets the truthfulness of claims and measures the efficacy of public policy

Reality Check: CBO Report Links Minimum Wage Hike to Job Losses

Examination sparks criticism of proposed wage hike but acknowledges great ‘uncertainty’ surrounding predicted job cuts

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    NEWSLETTERS

    In this edition of Reality Check, Sam Brock probes the CBO report and President Barack Obama's push for a federal minimum wage hike.

    The Congressional Budget Office holds a certain stature in Washington.

    Unlike the myriad think tanks and policy groups flooding the political airways with reports that are sometimes viewed as biased, left-leaning, right-leaning or simply unfair, the CBO is tasked with providing purely objective analysis.

    So when the nonpartisan, independent office releases a report on a hot button issue, the findings will almost certainly be a part of the national dialogue.

    Earlier this week, the CBO unveiled its report on what impact a federal minimum wage hike would have on jobs and family incomes.

    The report contained a mixed bag of information for both supporters and critics. CBO’s economists predicted a “small negative effect” on employment, according to director Doug Elmendorf, but also a substantial hike in the weekly wages of millions, lifting some percentage of affected workers out of poverty.

    Despite forecasting two principal effects on low-wage workers, however, most of the attention in the report’s aftermath has been on the predicted job cuts.

    Specifically, opponents of raising the minimum wage claim that anywhere between 500,000 and 1 million Americans could find themselves unemployed if the wage hike gets passed by Congress.

    Is this true?

    First of all, it’s important to note that the CBO simulated forecasts for two different scenarios.

    The first, a minimum wage hike to $9 an hour (from the current $7.25), would lead to around 100,000 job losses, according to the agency.

    But under that scenario the CBO also cited a range in employment impact, from a slight bump up to a loss of 200,000 jobs.

    The second scenario, an increase to $10.10 an hour that would be pegged to inflation in future years, would potentially cost some 500,000 Americans their jobs, the CBO said.

    That’s the origin of the 500,000 figure. However, that’s not a hard number. In fact, it’s once again part of a range.

    “There’s a very high degree of uncertainty in terms of these job loss estimates,” said Alex Field, Santa Clara University Economics Chair.

    “The CBO report says that in terms of the range of what this might mean, there’s a two-thirds probability it lies somewhere between a million people fewer employed, versus a negligible [amount].”

    Translation: The CBO says the most likely outcome is somewhere between 0 and 1 million people, with the 500,000 figure sitting right in the middle.

    Field also pointed out that the CBO report cited a 33 percent chance that the number of job losses would be outside of this pendulum.

    That is, that the minimum wage could either create jobs or net more than a million losses. Not exactly a hard, reliable figure.

    The CBO’s director made that point clear at a luncheon with the Christian Science Monitor, where he stressed both the breadth of the existing studies and how conflicting much of the research is on the federal minimum wage hike and employment.

    “I want to be clear that our analysis of the effects of the minimum wage is completely consistent with the latest thinking in the economics profession,” Director Elmendorf said.

    “We did an exhaustive review of the literature in this area up through reports that were released last month. There are a VERY large number of studies, as you know, and they reach a range of conclusions. And the studies all have strengths and weaknesses.”

    He continued, “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.”

    The uncertainty relates to not just the varied body of research, the CBO said, but also to factors like calculating the number of low-wage workers, the ‘ripple effect’ of a wage hike on higher-paid workers and even the state of the economy.

    This last point was also echoed by Field- that current economic conditions can go a long way in determining what effect a hike may have on employment.

    “It’s going to be different depending upon whether the economy is as it is now, with a very large output gap remaining, or whether we eventually get back to something closer to full employment,” Field said.

    The output gap is the difference between what the economy is actually producing and what it could produce, given available labor and technology.

    Right now, economists like Field contend that we are not maximizing our resources, leaving plenty of room for growth.

    “As you get closer and closer to full employment, and there’s fewer and fewer people who are out of work involuntarily, then some of the factors that the CBO is looking into in this report have more weight,” Field added.

    The CBO based its projections on a 6 percent unemployment rate in 2016, when the minimum wage hike would be fully phased in.

    As with the previously cited areas of ‘uncertainty,’ conditions are subject to change.

    “Our responsibility for the Congress is to report the middle of the distribution of possible outcomes, and where possible the range of likely outcomes,” Elmendorf said. “That’s what we’ve done in this report.”