CBO Report: Obama's Minimum Wage Plan Could Cost 1 Million Jobs

Image: CBO Report: Obama's Minimum Wage Plan Could Cost 1 Million Jobs

Tuesday, 18 Feb 2014 02:50 PM

By Todd Beamon

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President Barack Obama's plan to raise the federal minimum wage to $10.10 an hour will cost as many as 1 million jobs by late 2016, the Congressional Budget Office said on Tuesday.

If Obama and his fellow Democrats are successful in pushing the measure through, the increase would be fully implemented by the end of 2016. It would raise the rate for 16.5 million Americans.

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The current minimum wage is $7.25 an hour. The jump to $10.10 over three years represents a near — 40 percent increase.

Obama called for a $10.10 minimum wage in his State of the Union address last month. His plan would see increases this year, next year, and again in 2016 to bring the rate to $10.10. Obama is due to leave the White House in January 2017.

The Senate could begin debating such a bill as early as next month.

Tuesday’s CBO report marked the second by the office within weeks to throw cold water on the Obama administration’s claims about the economic benefits on one of its major policies.

Two weeks ago, the CBO reported that Obamacare would cost the economy 2.5 million workers by 2017, primarily because smaller companies would scale back hours to avoid requirements that full-time workers be offered health insurance. The Affordable Care Act is essentially leading businesses and Americans to choose government-sponsored benefits over work, according to the agency’s report

According to Tuesday's CBO report, the higher minimum wage rate could reduce U.S. budget deficits by a small amount for several years but then could increase them slightly in later years.

The CBO admits it cannot be accurate with its prediction, but estimates  a job-loss figure of around 500,000 — 0.3 percent of the working population.

"As with any such estimates, however, the actual losses could be smaller or larger; in CBO's assessment, there is about a two-thirds chance that the effect would be in the range between a very slight reduction in employment and a reduction in employment of 1 million workers," the report says.

Jobs for low-wage workers would probably be eliminated with the wage increase, and the income of most workers who became jobless would fall substantially, the report said. In addition, the share of low-wage workers who were employed would probably fall slightly.

Established under legislation signed by President Nixon in 1974, the Congressional Budget Office is a nonpartisan federal agency that provides independent analysis of economic and budgetary issues. The office makes its research available to Congress and the public and does not make policy recommendations.

Republicans praised the CBO report, saying that it confirmed long-held positions that a higher minimum wage is a job-killer for millions of Americans.

"This report confirms what we've long known: While helping some, mandating higher wages has real costs, including fewer people working," Brendan Buck, a spokesman for House Speaker John Boehner, said in a statement. "With unemployment Americans' top concern, our focus should be creating, not destroying, jobs for those who need them most."

Senate Minority Whip John Cornyn of Texas concurred.

"The non-partisan Congressional Budget Office confirmed yet again what we know to be true of government overreach in the marketplace: raising the minimum wage would slash jobs and harm an already fragile workforce," Cornyn said in a statement. "Whether it's Obamacare, a minimum-wage hike or a trillion-dollar stimulus bill charged to the nation's credit card, the bottom line is the president's big-government experiment kills jobs.

"It has made things worse not only for Americans who continue to look for a job, but also for the millions of Americans who have altogether given up looking for work," Cornyn added.

Sen. John Thune, the South Dakota chairman of the Senate Republican Conference, said in a statement: "More than 3.5 million Americans have been unemployed for six months or longer, and the percentage of Americans in the labor force is at a low we haven’t seen since Jimmy Carter was president. It’s time to give lower- and middle-income workers a break, not hammer them with more bad policies."

But Jason Furman, chairman of the White House's Council of Economic Advisers, attacked the report as flawed.

"CBO’s estimates of the impact of raising the minimum wage on employment does not reflect the current consensus view of economists," he said in a blog post reported by The Hill. “The bulk of academic studies have concluded that the effects on employment of minimum wage increases in the range now under consideration are likely to be small to nonexistent."

In its report, the CBO examined two options for increasing the minimum wage, to $10.10 an hour and to $9 an hour.

A $10.10 minimum wage would bring 900,000 people above the poverty threshold of $24,100 a year for a family of four. It would affect 300,000 people under a $9 minimum wage, the CBO said.

Families in poverty would see a total $5 billion increase in real income at $10.10 and $1 billion under a $9 wage, the CBO report estimates.

In total, 16.5 million workers would see their earnings rise with a $10.10 wage, while 7.6 million would benefit with a $9 wage, according to the CBO report.

After reaching their top thresholds in 2016, each minimum wage would be adjusted annually for inflation according to the Consumer Price Index.

But the $10.10 option would clearly have a greater effect on employment than the $9 option would, the CBO argues.

"More workers would see their wages rise; the change in their wages would be greater — and employment would be more responsive to a minimum-wage increase that was larger and was subsequently adjusted for inflation," the report said.

The higher earnings for some workers, however, would be offset by reductions in real income — adjusted for inflation — for those who lose their jobs because of the wage increase, the report said.

It also would affect business owners and consumers, who would face higher prices for goods and services, the report said.

But Democrats have said such claims are overblown and are outweighed by the benefits to workers and the overall economy as low-paid employees spend more money. Sen. Tom Harkin of Iowa, author of the Senate legislation, cited other research concluding that a higher minimum wage would create jobs, not reduce them.

"As the CBO report affirms, an increase in the minimum wage will help lift families out of poverty," Harkin said.

Ramesh Ponnuru, a visiting fellow at the American Enterprise Institute in Washington, labeled a $10.10 minimum wage "a worse idea than ever."

In a column for Bloomberg News, Ponnuru attacked Obama's notion that the higher rate would mostly aid families in America.

He noted that Obama's idea presented "a misleading picture of who minimum-wage earners are," citing a chart from the White House showing that only 26 percent of those earning the minimum wage have children.

"Thirty percent either have spouses and no kids or are kids themselves," Ponnuru said.

He cited a study that concluded that state poverty rates were not affected by higher minimum wages — and that only 11 percent of those living in poor households would benefit from an increase to $9.50 an hour.

"Forty-two percent would be people living in households making more than three times the poverty line (which means they’re well above the country’s median household income)," Ponnuru said.

He also quoted an observation by an AEI colleague, Michael Strain: "Hundreds of thousands of low-skill workers are trying to find a job but can’t. Is it really the right time to raise the cost of hiring and make it harder for businesses to hire them?"

Both Ponnuru and Strain advocate for a change in the earned income tax credit, which provides refunds to workers with low and moderate incomes, especially those with children.

"It is better targeted at people in low-income households, and it is very unlikely to reduce employment," Ponnuru said of the credit.

He said that raising the minimum wage was popular with politicians — and voters.

"A higher minimum wage has a lot of support in the polls, and it does nothing directly to make the federal budget numbers worse," Ponnuru said. "Even members of Congress who think it’s a bad idea hesitate to oppose it. A bad idea is nevertheless what it is."

The Associated Press and Reuters contributed to this report.

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