What Really Will Happen if the Minimum Wage Increases? - Higher Education

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What Really Will Happen if the Minimum Wage Increases?

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by William Spriggs

William SpriggsLast week, the nonpartisan Congressional Budget Office (CBO) released a report saying that the proposal to increase the minimum wage to $10.10 an hour in 2016 would cost the creation of 500,000 jobs in 2016. While the CBO did conclude that millions of families would be lifted out of poverty, it cautioned there would be real losers by adding people to the rolls of the unemployed and underemployed.

The conclusions of the CBO are curious because the research it cites in its report on the minimum wage points to opposite outcomes. For instance, the CBO cites the work of Hristos Doucouliagos and T.D. Stanley who looked at more than 64 studies on the jobs effect of minimum wage increases.

Doucouliagos and Stanley conclude there is: “Little or no evidence of a negative association between minimum wages and employment … .” The CBO also cites the work of David Card and Alan Krueger who similarly conclude that, after reviewing the available research, there is little support for a negative relationship between minimum wage increases and employment loss. The CBO also cites the work of Dale Belman and Paul Wolfson, who limit their look to synthesizing the findings of research done since 2000.

Belman and Wolfson conclude: “The effects are statistically detectable but small, even when restricting attention to the effect on either youth or the food and drink sector.” The CBO also cites a study by John Schmitt that synthesizes the many studies done since 2000 on the effects of the minimum wage. Schmitt concludes that: “The weight of that evidence points to little or no employment response to modest increases in the minimum wage.”

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The CBO in its text says it thinks the studies that are most reliable look at changes in the minimum wage that have been taking place at the state level and that the studies need to control for local labor market differences. This is an endorsement of the approach taken by the work of Sylvia Allegretto, Arindrajit Dube, Michael Reich and Ben Zipperer that CBO also cites. CBO looks heavily at the effect of the minimum wage on teen employment. Teenagers are a small fraction of minimum wage workers, but a large share of teenagers are affected by changes in the minimum wage.

The Allegretto study they cite, using methodology that CBO reports is the most reliable, finds that increasing the minimum wage has between a very small negative effect to a small positive effect on teen employment, but either effect is so small it is essentially zero; no effect.

So, if the available evidence CBO considered suggests that there aren’t employment effects, why would the CBO report employment effects? The studies of Doucouliagos and Stanley and of Card and Krueger CBO cites discuss a phenomena known as “publication bias.” Because for many years, economic theory predicted that raising the minimum wage would lead to job loss, the only available research published by economists showed job losses.

Economists either manipulated their models to get the desired effect-leaving out other important variables and explanations for job losses or didn’t get published. Unfortunately, the CBO appears to have succumbed to a similar malady in policy discussions. But, as is often the case, policy in Washington is behind.

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So, despite overwhelming support from Nobel laureates in economics and past presidents of the American Association for raising the minimum wage because those on the cutting edge of economic knowledge know the consensus of the field has changed, the policy debate in Washington is locked in the old world because Republicans have made increasing the minimum wage a partisan issue. The safe spot for the “nonpartisan” CBO is to side with Republicans that there will be job loss, but give in to the current state of economic thinking that wages will rise and poverty fall.

It is a strange change in fate that raising the minimum wage is no longer an issue to economists but is a political football. Until the 1970s, increases in the minimum wage won majority support from both Republicans and Democrats. Given the overwhelming support of Americans for raising the minimum wage, and the current state of economic knowledge, raising the minimum wage should be smart policy, not partisan. The CBO should have punted instead of creating needless confusion.

Follow Spriggs on Twitter: @WSpriggs.

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