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.