What will happen if the minimum wage increases?


By WILLIAM SPRIGGS | 2/27/2014, 4:42 p.m.

Last week, the nonpartisan Congressional Budget Office (CBO) released a report saying that the proposal to increase the minimum wage to $10.10 an hour in 2016 would cost the creation of 500,000 jobs in 2016. While it did conclude that millions of families would be lifted out of poverty, it cautioned that the proposal would also result in many people being unemployed and underemployed.

The CBO’s conclusions are curious because the research it cites in its report on the minimum wage points to opposite outcomes. For instance, the report cites the work of Hristos Doucoliagos and T.D. Stanley, who looked at more than 64 studies on the effects minimum wage increases can have on jobs.

Doucouliagos and Stanley conclude, “[There is] little or no evidence of a negative association between minimum wages and employment.”

The CBO also cites the work of David Card and Alan Krueger, who similarly conclude that after reviewing the available research, there is little support for a negative relationship between minimum wage increases and employment loss.

The CBO also cites the work of Dale Belman and Paul Wolfson, who look at the findings of research done since 2000. Belman and Wolfson conclude: “The effects are statistically detectable but small, even when restricting attention to the effect on either youth or the food and drink sector.”

The CBO also cites a study by John Schmitt that examines the many studies done since 2000 on the effects of the minimum wage. In the report, Schmitt says, “The weight of that evidence points to little or no employment response to modest increases in the minimum wage.”

In the text, the CBO says it thinks the studies that are most reliable look at changes in the minimum wage that have been taking place at the state level, and that the studies need to account for local labor market differences. This is an endorsement of the approach taken by Sylvia Allegretto, Arindrajit Dube, Michael Reich and Ben Zipperer in their studies, which the CBO also cites. The CBO looks heavily at the effect of the minimum wage on teen employment. Teenagers are a small fraction of minimum wage workers, but a large portion of teenagers are affected by changes in the minimum wage. 

The Allegretto study the CBO cites—which uses methodology that the CBO reports is the most reliable—finds that increasing the minimum wage has between a very small negative effect to a small positive effect on teen employment, but either effect is so negligible that it is essentially zero.

So if the available evidence the CBO considered suggests that there aren’t effects on employment, why would the CBO report employment effects? The studies of Doucouliagos and Stanley and of Card and Krueger that the CBO cites discuss a phenomena known as “publication bias.”

For many years, economic theory predicted that raising the minimum wage would lead to job loss, so the only available research published by economists showed job losses. Economists either manipulated their models—leaving out important variables and explanations—to get the desired effect or didn’t get published. Unfortunately, the CBO appears to have succumbed to a similar malady in policy discussions. But, as is often the case, policy in Washington, D.C., is behind. 

So despite the overwhelming support for the proposal from Nobel laureates in economics and past presidents of the American Association for raising the minimum wage because those on the cutting edge of economic knowledge know the consensus of the field has changed; the policy debate in Washington is locked in the old world because Republicans have made increasing the minimum wage a partisan issue. The safe spot for the “nonpartisan” CBO is not to side with Republicans in saying that there will be job loss, but to give in to the current state of economic thinking that wages will rise and poverty fall.

It is a strange change in fate that raising the minimum wage is no longer an issue to economists but a game of political football instead. Until the 1970s, increases in the minimum wage won majority support from both Republicans and Democrats. Given the overwhelming support of Americans for raising the minimum wage and the current state of economic knowledge, raising the minimum wage should be smart policy, not a partisan policy. The CBO should have punted instead of creating needless confusion. 

William Spriggs is the chief economist of the AFL-CIO.