Robert Samuelson February 23, 2013

The great virtue of the Congressional Budget Office’s recent report on the minimum wage is that it injects a much-needed dose of reality into the debate over job creation. The Obama administration and its congressional allies have taken the position that raising the minimum wage almost 40 percentwould have little, if any, adverse effect on jobs. The CBO rejects thisview as unlikely. The gap between the administration’s claim andplausible outcomes reveals larger inconsistencies in the White House’sboast that job creation is a top economic priority.

Under the proposal, the federal minimum wage would go from today’s $7.25 to$10.10 by 2016 in three annual steps. Conservatives have argued thatthis would kill jobs — if government boosts the cost of labor, employers will buy less of it — while doing little to reduce poverty. By andlarge, the CBO report supports this critique. Here are its mainconclusions:

● The higher minimum wage would reduce jobs by about 500,000, or 0.3percent of projected 2016 employment. The CBO admits that its estimatesinvolve much uncertainty. Job loss, it says, might be as high as 1million or as low as almost nothing. The half-million figure is its best judgment.

● Up to 25 million workers would receive wage increases, about 16.5million below the proposed minimum and possibly 8 million more justabove it. Wage increases would raise the incomes of families in povertyby about 3 percent, or $300 annually. The effect is muted because mostpeople in poverty don’t have jobs and many low-income workers arepart-time (47 percent).

●Higher incomes would lift about 900,000 people above the government’s povertyline in 2016 ($24,100 for a family of four). That’s about 2 percent ofthe projected 45 million poor. The small impact also reflects the factthat many low-income workers, presumably young, come from middle-classfamilies, including 33 percent from families with incomes exceedingthree times the poverty line.

An administration serious about job creation has to sacrifice other priorities to achieve it. This, President Obama hasn’t done.

In another report, the CBO estimated that the health insurance subsidies in the Affordable Care Act (Obamacare) would discourage people from working, resulting in a loss of theequivalent of 2.5 million full-time workers by 2024. The ACA alsocontains powerful disincentives against hiring low-income workers byrequiring companies to provide their health insurance. The Keystone XLpipeline is an example of a job-creation project that has been delayedon other grounds.

Choices exist. On some, the White House has voted against job creation.Naturally, it tries to obscure this. Concerning the minimum wage, itpredictably assailed the estimated job losses. These don’t reflect the“consensus view of economists . . . that raising the minimum wage haslittle or no negative effect on employment,” wrote Jason Furman and Betsey Stevenson of the White House Council of Economic Advisers.

How convenient. Conflicts vanish. The decision is a no-brainer. So say the studies.

This is fairy-tale economics. Many studies find negative job effects. TheCBO didn’t make them up. As important, the CBO shows — and this is itsreal contribution — why many recent studies may not be relevant totoday’s proposal. The reason: The proposed increase is much “larger than most of the increases that have been studied.” Even after inflation, it would likely be about a third. Moreover, the minimum would be indexedto inflation, rising automatically with prices. This, too, is new.

All these differences suggest larger job effects, says the CBO. Cuttingjobs involves one-time costs and disruptions that companies may avoidfor small increases in the minimum — but not for big increases.Similarly, more workers would be affected than in the past (about 10percent of workers compared with 5 percent for increases since 1980).Finally, indexing the minimum wage to inflation implies a permanencethat may inspire firms to make deep cuts in labor costs. Companies won’t hire unless new workers are profitable.

Hiking the minimum wage is more compelling as politics than as social policy.The best way to help low-income workers would be to expand the EarnedIncome Tax Credit (EITC), which is a wage subsidy. This would eliminatehiring disincentives and focus benefits on the poorest workers.

But the EITC lacks the minimum wage’s political charms. The minimum wage is liberals’ symbol for showing how much they care for the poor — and howmuch they despise inequality — while demonstrating conservatives’callousness. Congress gets to dispense pay increases to millions ofworkers, using private dollars. By contrast, expanding the EITC wouldrequire scarce on-budget dollars.

To be sure, weak labor markets still reflect the Great Recession’shangover. But the administration isn’t helping. It needs a new spirit:Make jobs, not propaganda.

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