On Tuesday, the non-partisan Congressional Budget Office released new findings which conclude that if the national minimum wage is increased from the current $7.25 to $10.10 an hour, as President Obama is pushing, it would result in the loss of around 500,000 jobs.
It is no secret that raising the minimum wage results in job losses at least initially, as history has shown. But the fact that Mr. Obama wants to raise the minimum wage by almost 40%, assuming he gets his way, could result in the loss of far more jobs than with past wage increases that were significantly smaller.
As you might expect, the White House vehemently dismissed the latest findings from the CBO and called into question the methodology of the study. Republicans, on the other hand, pounced on the CBO report and argued that the minimum wage should be increased by a smaller amount.
But the loss of 500,000 jobs due to the pay increase was not the only conclusion in the latest CBO report. The study estimated that the minimum wage increase $10.10 would boost earnings for some 16.5 million people, lifting apprx. 900,000 above the poverty line.
The latest CBO analysis lands in the middle of an election-year debate over Democrats’ proposal to lift the minimum wage for the first time since 2009. In his State of the Union address, Obama vowed to make the minimum wage increase mandatory for all employees of government contractors, which he says can do without congressional approval via an Executive Order. But what he really wants is for Congress to pass the minimum wage increase to $10.10 for everyone.
The idea is stalled in Congress, where Republicans say it would hurt the economy by making it more expensive for businesses to hire. Even many Democrats are questioning a raise of almost 40% in the minimum wage. Some Republicans have instead called for expanding the earned income tax credit, a wage supplement to the working poor. Some favor phasing in the large wage increase over three years, but even so it would cost some low-earners their jobs as their labor will become much more expensive.
How Many Americans Earn the Minimum Wage?
Of our apprx. 145 million labor force, only about 5.5 million workers earned within 25 cents of the minimum wage in 2013, according to the CBO report. Most of these people are younger folks and 60% of them work part-time jobs. The point is, we are not talking about a huge segment of the population.
Also as noted above, the minimum wage increase would have a relatively modest impact on poverty. The CBO report shows that the proposed wage increase would cut the projected 45 million people living in poverty in 2016 by just 2%, or about 900,000. Their average real income would grow by $300 a year, or about 2.8% as a result of the increase, the report said.
The impact on poverty would be diluted in part because some of the minimum wage workers, especially teenagers, are from higher-income families. While most of the increased income would go to lower-earning families, almost 30% would accrue to families earning three times the poverty threshold or more.
So what’s the bottom line? Raising the minimum wage by almost 40% to $10.10 per hour will kill at least 500,000 jobs according to the non-partisan CBO. That’s in addition to the 2 million jobs that are expected to disappear as a result of Obamacare, which I wrote about on February 6.
Why then would Obama pressure Congress to raise the minimum wage to $10.10 for everyone? The main reason may be that many union compensation contracts are tied to the minimum wage. If the minimum wage goes up, many unions’ pay automatically goes up as well. There you have it! Of course, the media has failed to disclose that nugget of information, but now you know.
In any event, I do expect that there will be an increase in the minimum wage this year. Both sides will compromise to get something done before the November elections. It’s politics as usual, what else is new? Yet it is very unlikely, in my opinion, that it will increase from $7.25 to $10.10 as President Obama wants. It will be somewhere in between.
At the end of the day, the combination of a higher minimum wage and the job elimination effects of Obamacare will result in higher unemployment down the road.
Here’s a good article from Forbes that comes to the same conclusion.
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