CBO Weighs in on a $15 Minimum Wage

POLITICS & POLICY
Demonstrators march past a McDonald’s restaurant during a protest calling for a $15-an-hour nationwide minimum wage in Chicago, Ill., in 2016. (Jim Young/Reuters)

. . . and also evaluates $12 and $10 options, in a fascinating if speculative new report. (The effects of minimum wage are hotly debated, so while the CBO aims to base its work on middle-of-the-road estimates, there’s nothing definitive about it.)

One way of looking at the basic findings (presented in Table 1, pertaining to the year 2025) is that they summarize the two types of redistribution that the minimum wage entails. First, and most obviously, it redistributes money from businesses and their customers to workers who otherwise would make less than the minimum. Second, however, it reduces employment by artificially inflating the cost of employing a low-skilled worker — in effect, killing the jobs of some such workers in order to beef up compensation for others.

Under a $15 minimum wage, the CBO’s best guess is that 17 million workers would see higher pay — plus some smaller number who already made more than $15 but might get raises too — while 1.3 million would lose their employment. (That would equal a 0.8 percent reduction in the number of employed workers.) This implies the policy would kick one person out of his job for every 13 people who got a direct pay boost. And naturally those raises don’t come from nowhere; they’re paid by businesses, which in turn earn money from customers.

Adding together the various effects — higher wages, lower employment, higher prices, etc. — the CBO estimates that, on balance, a $15 minimum wage would give $7.7 billion to folks below the poverty line, boosting their income 5.3 percent, and $14.2 billion to folks between one and three times the poverty line, boosting their income 3.5 percent. Everyone above that loses a small percentage of income (0.1 to 0.3 percent, depending on which income group we’re talking about), but these amounts add up to $30.5 billion, meaning that the policy costs Americans in general $8.7 billion on net.

Would you take $30.5 billion from the middle and upper classes to give $21.9 billion to the poor and working classes, in the process kicking 1.3 million low-skilled workers out of their jobs? It seems to me that can’t be the best policy.

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