The most recent acknowledgement of economic reality has left Democratic leaders furious. This week, the non-partisan Congressional Budget Office released a report on the employment effects of increasing the minimum wage.
Instead of only pointing out one side of the issue—that some workers would be paid more—the CBO report brings up economic tradeoffs as well. One major downside of a higher minimum wage is that many low-wage workers would lose their jobs.
CBO finds that raising the minimum wage to $10.10 an hour by 2016—as President Obama advocates—will reduce total employment by up to one million workers. These types of economic calculations are notoriously difficult to make with precision. However, the findings point to a substantial number of workers being pushed out of the labor force. Higher wages render some skillsets no longer employable.
Jason Furman, chair of the White House Council of Economic Advisors responded to the report by saying, “zero is a perfectly reasonable estimate of the impact of the minimum wage on employment.”
Furman’s response defies basic economic principles. What business owner will be encouraged to increase hiring after the cost of minimum wage employment rises 40 percent? The proposed federal rate of $10.10 an hour is higher than any state’s current minimum wage. Pretending costs do not exist is misleading and unrealistic.
Businesses always have the option to not pay people at all—by letting workers go or not hiring new applicants. Employers are only forced to pay minimum wage to those people they employ.
Businesses are not charities. Paying workers more than the value their skills provide makes it difficult for businesses to earn profits, stay open, and continue to serve customers. The slow economic recovery has already made this difficult enough, especially for small businesses.
When the minimum wage is increased, workers whose skills are below the new level are often let go, while those with higher skills are retained. The highest-skilled minimum wage workers benefit from the raise because they are still employable. These workers probably would have probably received a raise or moved to a new job anyways. However, those workers whose skills cannot provide as much value are left jobless.
The long-term unemployed and young workers already have difficulty finding work. Why should the federal government make job hunting even more difficult for these millions of Americans by taking away their freedom to develop job skills?
Another interesting CBO finding is that only 19 percent of the projected increase in workers’ earnings would go to families living below the poverty line. The reason this percent is so low is that most minimum wage earners are not middle-aged career workers struggling to lift their families out of poverty. Half of minimum wage earners are younger than 25, and half are working part-time.
Proponents of a higher minimum wage argue that 70 percent of families making the minimum wage earn under $60,000 annually. This statistic should not be surprising as median household income is $51,000. Additionally, the average family income of minimum wage workers exceeds $53,000 a year.
Raising the minimum wage does lead to some workers taking home more money. However, that is less than half the story. Those who benefit from minimum wage increases are mostly middle class, part-time workers. A higher minimum wage does nothing to help those who need increased opportunity the most. If poverty alleviation is the goal, there are better approaches which reward work and promote opportunity, such as the earned income tax credit.
Raising the minimum wage has real downsides which overshadow the economic gains some workers experience. Thankfully, the CBO acknowledges that truth in its report.
Jared Meyer is a research assistant for the philosopher Douglas Rasmussen. You can follow him on Twitter here.