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Home Publications Blogs Beat the Press CBO Projects Employment Loss from Minimum Wage Hike Would be Comparable to Impact of Iraq War Size Increase in Military Spending

CBO Projects Employment Loss from Minimum Wage Hike Would be Comparable to Impact of Iraq War Size Increase in Military Spending

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Tuesday, 18 February 2014 21:15

The Congressional Budget Office (CBO) released a report today on the impact of an increase in the minimum wage, which projected that it would lead to a loss of 500,000 jobs. This was quickly seized on by opponents of the minimum wage hike as implying a disastrous loss of jobs. Unfortunately, some of the reporting on the issue was less clear than it could have been.

The CBO projections imply that 500,000 fewer people will be employed at low wage jobs. It did not say that 500,000 people would lose their jobs. This is an important distinction. These jobs tend to be high turnover jobs, with workers often staying at their jobs for just a few months. While there will undoubtedly be cases where companies go out of business due to the minimum wage hike (many small businesses are always at the edge, so anything can push them over) the vast majority of the lost jobs are likely to be in a situations where businesses don't replace a person who leaves or don't hire additional workers as quickly in response to an uptick in demand.

This means that we are not going to see 500,000 designated losers who are permanently unemployed as a result of this policy. Rather, the projection implies that workers are likely to find it more difficult to find new jobs when they leave an old job or when they first enter the workforce. With 25 million people projected to be in the pool of beneficiaries from a higher minimum wage, this means that we can expect affected workers to put in on average about 2 percent fewer hours a year. However when they do work, those at the bottom will see a 39.3 percent increase in pay.

There are two other points worth noting on the CBO report. First, there is considerable research indicating that there might be no employment effect from a minimum wage hike of this magnitude. Based on this body of research, it is certainly possible that CBO has overstated the employment effect of this proposed increase in the minimum wage.

The other point is that we have often implemented policies that have had a comparable impact on employment and never even given the job loss a moment's consideration. A few years back we commissioned Global Insight, one of the country's leading economic forecasting firms, to project the impact on jobs and growth of an increase in military spending equal to one percentage point of GDP, roughly the annual cost of the Iraq war from 2003 to 2010. Their model showed that after 10 years it cost 464,000 jobs and after 20  years the economy would have 668,000 fewer jobs as a result of higher military spending.

Interestingly, the job loss associated with higher military spending never got mentioned in discussions of the Iraq War, nor is it mentioned in ongoing debates over the appropriate level of defense spending. If members of Congress and the media don't feel that job loss of this magnitude is worth mentioning in reference to defense spending, it is difficult to see why it would be so important in discussions of the minimum wage.

Comments (8)Add Comment
We're still in a liquidity trap!
written by Dave, February 18, 2014 11:08
This rise in minimum wage should create 1-2 million new jobs because of the liquidity trap.
What liquidity trap, Dave?
written by jaaaaayceeeee, February 19, 2014 12:42
What liquidity trap, Dave? Isn't that why Larry Summers talks about secular stagnation, instead?

Elmendorf, Lew, Geithner, Summers, and others have pushed Elmendorf's carefully crafted weasel-speak analyses, to nurture talking points for deficit hawksterism, to tank health reform under Clinton and Obamacare, and obsfucate the case for minimum wage reform (wasn't Elmendorf one of the first to demand we serve the confidence fairy?).

Jack Lew thought up the shiv of sequestration, and Geithner and Summers rescued financialization at the expense of everyone else and the economy, while advising that Christy Romer's woefully inadequate stimulus recommendation was more than needed, for what they predicted would be only a brief, cyclical recession, not the liquidity trap we are still in, five years later. Which they still deny, preferring agentless scary robots or globalization tales.

They all pushed deficit hawksterism, to sell off our government services, earned benefits and safety nets. This doesn't even begin to count elected Democrats who sold out their constituencies to the highest bidders.

The supposed business agenda of the Republican party is economically destructive redistribution upwards, at the expense of productive business. This requires denial of any such beast as a liquidity trap (except for Ben Bernanke's ignored requests for expansionary fiscal policy, which like Summers' secular stagnation avoids liquidity trap language, for which we already know the cure).

But most Democrats don't dare say 'stimulus' or 'liquidity trap' out loud either, consistent with revenue neutral, status quo budgeting, or 'belt tightening' austerity promotion, like President Obama's. This is how voters are still getting sold out, while Democrats say they uphold the principles of the New Deal.

Other than Elizabeth Warren, Bernie Sanders, and the Democratic Caucus in the House of Representatives, how many Democrats even admit that austerity has been disastrous, let alone that we're in a liquidity trap that won't be cured by some more outsourcing, spending cuts, and revenue neutral tax code reforms (meaning more shell games)?
Crocodiles Tears
written by James, February 19, 2014 2:06
You got it! Defense waste costing jobs is perfectly fine bc defense spending benefits their donors the most.

Politicians who are crying that the rise in minimum wage will cost minimum-wage workers losing their jobs are the same type of tear that O.J. Simpson are shedding for his inability to find his ex-wife's killer(s).
A Minimum Wage Here, A Minimum Wage There, Pretty Soon You're Talking About Real Money ...
written by Last Mover, February 19, 2014 5:00

Wow, a 39% increase in pay. How much is that for a minimum wage worker, enough to put gas in the car and look for another job?

Maybe it could be better spent listening to Donald Rumsfeld speak on the rubber chicken circuit to the talk radio crowd for $25 a pop, explaining how Obama is taking their jobs with high taxes that stifle the economy and job creation, while redistributing unearned gains to the lower classes that cause them to work even less.

He should know, having taken so many jobs himself from the economy through unnecessary defense spending, and for attacking the wrong country at that.

BTW, speaking of incentives and minimum wages, how is it that such small amounts in absolute terms in the context of standard of living requirements for one individual or family, are said to have such profound impacts on incentives to hire and work ...

... when incentives that obviously drive billionaires to destroy the economy with massive political and market power are mysteriously immune to said competitive forces ... casually ignored by sock puppet media as "normal" incentives at work under "free market competition" ... just like those that determine wages aren't they.

There's only one answer to this economic mystery America, announced recently by Bill O'Reilly. The internet makes Americans stupid. That's why they need less of it compared to the rest of the developed world ... to fall in line with those minimum wages.
Slight Quibble
written by Jeffrey Stewart, February 19, 2014 8:42
"Interestingly, the job loss associated with higher military spending never got mentioned in discussions of the Iraq War, nor is it mentioned in ongoing debates over the appropriate level of defense spending. If members of Congress and the media don't feel that job loss of this magnitude is worth mentioning in reference to defense spending, it is difficult to see why it would be so important in discussions of the minimum wage." -D. Baker


Esai Morales said one time on Bill Maher, "Let's call it what it really is, offense spending." It hasn't been defense spending for a long time. It's either that or military spending.

Does anyone doubt that that vast majorityo9f US residents would be safer and more secure with full employment, living wages, affordable health insurance (single payer), enough food, clean drinking water and air, higher quality education and infrastructure improvements than they are with over $1 Trillion in annual military/offense spending?

It's ironic that politicians are so concerned about keeping the "American people safe" that they are willing to let many atrophy from unemployment, suffer hunger and malnutrition and exposure from homelessness.

The people need to redefine "safe and secure" for the politicians. Since it's more likely I'll win the lottery than die in a terrorist attack, I'll take my chances with less offense spending and more human needs spending.
...
written by Alex Bollinger, February 19, 2014 10:02
500K is also about the number of people killed in the Iraq War. If we think that any policy that would unemploy that many people should not be pursued, what about policies that kill that many people?
...but defense spending right now would create a ton of jobs
written by Nick Bradley, February 19, 2014 10:30
...because we have all this slack capacity and we're in a liquidity trap.

Naval procurement has a pretty big multiplier, and puts lots of ironworkers on the job.
Justin
written by Justin, February 21, 2014 9:21
Dean, what about the stimulative effect of a rise in worker wages? Surely the increase in demand powered by this population would have some countervailing and longer-term effect that might in turn boost hiring. Any numbers on that?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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