The Congressional Budget Office (CBO) released a report analyzing President Obama’s proposal to raise the federal minimum wage from the current $7.25 per hour to $10.10 with annual increases equal to inflation thereafter.
The CBO notes the standard trade-off: increase in some wages with many losing their job. Specifically, they find that the proposal might increase earnings for 16.5 million low-wage Americans but cost the nation a half-million jobs, during a period when we cannot afford job losses (see figure below).
Keep in mind that these results are from a static analysis compared with the dynamic world in which we live. There are differences between the job losses we see and those we do not see from a higher cost of doing business and more future job losses, leading to a much higher total of job losses than those reported by the CBO.
To put it simply, in the labor market, a wage is the price of labor. A minimum wage set above a market wage benefits low-skill workers who keep their job and incentivizes more to work (i.e. increase in quantity supplied). However, it also means higher costs for firms, leading to less hiring (i.e. decrease in quantity demanded). This brings about a surplus of workers, or an increase in unemployment, which supports the CBO’s argument.
Economists disagree about raising the minimum wage because studies find mixed employment results. The recent article “Economists Debate the Minimum Wage” reviews these studies and argues that much of the debate misses key points.
A primary problem with the newer wave of research that finds little employment effects is that these economic models consider changes in the employment level but not changes in the employment growth rate. Though employers may not initially fire workers, the higher wage will reduce their future hiring and discourage hiring of low-skilled workers—the group advocates hope to help.
The CBO also argues that the increase in minimum wage may lift 900,000 people out of poverty, which is equivalent to a 2 percent reduction of those in poverty. The figure below illustrates the impact of a minimum wage hike on family income. The horizontal axis is the ratio of family income to the poverty threshold, representing different levels of family income, and the lighter shade shows the effect on real income (see figure below).
Unsurprisingly, the increase in the minimum wage benefits a low-income family more; however, the wage increase reduces a wealthiest family’s real income by 0.4 percent (see figure below).
Supporters of the minimum wage argue that it alleviates poverty, reduces inequality, and improves the quality of jobs. Although the minimum wage is sold to the public as a means to raise the standard of living for a large number of Americans, 3.6 million workers—only 4.7 percent of hourly paid workers—earned a wage at or below the minimum wage in 2012, as noted by the Bureau of Labor Statistics.
It is also not likely that minimum wage workers support a family, as many of them are young and likely live with someone else or have a second income.
The Bureau of Labor Statistics notes that among hourly-paid workers 65 percent of never-married workers are paid at or below the minimum wage, while only 22 percent of married workers fall "in this category." Digging deeper into the data, over half of those earning the minimum wage are between the ages of 16 to 24 years old. Minimum wage workers typically work in service occupations, such as food preparation and serving-related jobs and the leisure and hospitality sector, according to the Census Bureau.
Along with the federal law, many states and localities have minimum-wage laws. Currently, state minimum wages range from $7.25 to $9.32 per hour. This means that the $10.10 proposal would affect all states and affect each state differently depending on their cost of living, which varies widely across the nation. For example, using cost of living calculators from CNN, to stay at the same standard of living, one would need to earn 40 percent more if moving from Austin, TX to Los Angeles, CA.
With Texas having one of the lowest costs of living in the nation, this minimum wage increase would have a much more costly effect on Texas’ firms than it would in higher priced areas, such as California, which recently passed legislation to raise their wage to $10 by 2016.
The underlying argument of mandating a minimum wage is to legislate a minimum standard of living. The argument to raise it is to adjust the minimum wage for increases in the cost of living.
Unfortunately, a minimum wage neither sustains a minimum standard of living nor adjusts for cost of living. Also, the cost of living is not the same across all states, so a one-size-fits-all federal wage is terrible policy.
Instead of asking the government to artificially raise everyone’s wage without higher productivity, workers will benefit more from a well-functioning market that allows them the opportunity to educate themselves and improve their skills by working. From the intuitive costs and those outlined by the CBO and other research, Texas’ legislators would be wise to not raise the state’s minimum wage and should push against any talk of raising the wage by those 1,500 miles away in Washington, D.C.