The Congressional Budget Office’s (CBO) new report finds that a minimum wage increase to $10.10 would raise wages for 16.5 million Americans, adding up to a total of $19 billion in pay increases, and lift 900,000 out of poverty. These findings are well explained in the report and its appendices.
But other effects on employment, employee turnover, public spending, prices, and profitability are less well explained, opening the CBO report up to important questions about its conclusions, particularly the claim that increasing the minimum wage to $10.10 an hour would cost 500,000 jobs.
The method used by the CBO to estimate job loss is never clearly explained. According to the Appendix, the figure appears to come almost entirely from its “synthesis” of the research literature — which it concludes implies an elasticity of teen employment of -0.075 percent. This estimate is a bit below the low end of estimates in papers by Neumark and Wascher or Sabia and Burkhauser, but higher than those in various papers by Dube, Reich, and others. No details are provided concerning how the CBO arrived at this number, except that it discounts some older studies slightly because of publication bias. It uses an adult minimum wage employment elasticity of about -0.025 percent, even though Neumark and Wascher do not report statistically significant employment effects for adults.
Some of the studies that the CBO relied on are also problematic. As is explained in detail in a 2013 paper by Allegretto et. al that the CBO cites, the Neumark and Wascher paper and other studies that find negative employment effects suffer from methodological flaws that bias their estimates. Our best employment estimates, correcting for the biasing pre-trends in the older studies, are closer to zero. Allegretto et al. also refute Neumark and Wascher’s attempts to critique our previous studies.
It is disappointing that no mention of the problems in the previous literature is included in the CBO’s Appendix, suggesting that it included flawed studies in its estimated “synthesis.” It thus appears to have counted the studies equally without making any adjustments for their quality. This is especially surprising since the economic research literature has been divided on how to measure employment effects.
The CBO also arbitrarily increases its estimates of negative employment effects by providing a theoretical argument that longer-term effects will be greater than short-term effects. However, no evidence for longer-term effects is cited. In Allegretto et al., we find no such lagged effects, even four years after a minimum wage increase, enough time for businesses to add more capital equipment.
Savings from reduced employee turnover
The CBO report cites the Dube, Lester and Reich paper that finds increasing the minimum wage leads to major reductions in employee turnover. But it is not clear that these savings are included in the CBO study. To do so would require measures of recruitment and retention costs per hire, which are available but are not mentioned in the report. The savings for businesses provide an important explanation for why minimum wages do not affect employment in high-turnover industries.
The CBO report states that higher minimum wages will increase consumer prices. However, the assumed price effects are not spelled out anywhere in the report, nor is there any reasoned explanation of their effects on consumer demand.
The report cites, but does not at all discuss, research from 2008 by Aaronson et al. on price effects. Aaronson’s data, which are quite old, indicate that a 39 percent minimum wage increase to $10.10 would increase prices in restaurants on a one-time basis by about 3 percent. But restaurants comprise only about one-tenth of consumer spending, and the effects in retail and hospitality, the other major employers of minimum wage workers, are likely to be much less than 1 percent. The report unfortunately does not explore such details.
The report suggests businesses’ profitability will decline, but it offers no evidence. The minimum wage research literature contains only one study of profitability effects based on nursing homes in Britain. We do not know that profits will fall, since cost increases are largely passed on to customers through higher prices.
Reductions in public spending
The report includes an excellent explanation of why minimum wage increases would have little or nor effect on how much the governments spends on the Earned Income Tax Credit (EITC). This conclusion is sensible because EITC benefits increase for those who have very low incomes and then decrease, but do not phase out entirely until a family makes about $48,000 a year.
Yet surprisingly, the CBO report is silent on the effects of a minimum wage increase on SNAP (Supplemental Nutrition Assistance Program, or food stamps) spending. SNAP benefits decline by 30 cents for every additional dollar of income and phase out entirely for a family of three that makes about $25,000. SNAP spending is thus very likely to fall because of a minimum wage increase. My forthcoming causal study suggests that the government’s savings because of reduced spending on SNAP would be quite substantial.
Michael Reich is a professor of economics and the director of the Institute for Research on Labor and Employment at the University of California at Berkeley.