The Clear Benefits of a Higher Wage

From the New York Times Editorial Board:

Republicans sputtered with outrage when the Congressional Budget Office said that immigration reform would lower the deficit, strengthen Social Security and speed up economic growth. They called for the office to be abolished when it dared to point out that tax cuts raise the deficit or when it highlighted the benefits of health care reform. But now that the budget office has predicted (and exaggerated) the possibility that an increase in the minimum wage might result in a loss of jobs, Republicans think it’s gospel.

“This report confirms what we’ve long known,” said a spokesman for the House speaker, John Boehner. “While helping some, mandating higher wages has real costs, including fewer people working.”

What Republicans fail to mention is that Tuesday’s report from the budget office, a federal nonpartisan agency, was almost entirely positive about the benefits of raising the minimum wage to $10.10 by 2016, as President Obama and Congressional Democrats have proposed.

But the report said there could be a cost to the wage increase, and most of the headlines have focused on the possible loss of 500,000 jobs, or about 0.3 percent of total employment. That bears further scrutiny, because, unlike the benefits, the employment estimates have been disputed by a wide variety of nonpartisan economic studies.

What the report actually says is that there is a two-thirds chance that a $10.10 wage would produce job losses in a range from just above zero to one million. The number 500,000 was simply picked as a midpoint. (There is a one-third chance the wage increase would lead to more than a million job losses or actually increase employment.) A range that big is essentially the budget office’s way of saying it doesn’t really know what would happen to employment if the wage goes up, because, as the report says, there is vast uncertainty about how much wages will go up on their own over the next three years, and uncertainty about how employers would react to a higher minimum.

The budget office didn’t do its own research on those variables. It surveyed the economic literature on the subject, and chose a figure more conservative than the most recent and rigorous studies have found. That means the job-loss figure needs to regarded skeptically, as a careful reading of the report shows, while the benefits are undisputed.

Those benefits to millions of low-wage workers overwhelmingly outweigh the questionable possibility of job losses. Lawmakers who focus only on the potential downside of an enormously beneficial policy change are the same ones who never wanted to do it in the first place.

Minimum Wage Increase Would Have Mixed Effects, CBO Report Says

From the New York Times by Annie Lowrey:

A popular Democratic proposal to raise the minimum wage to $10.10 an hour, championed by President Obama, could reduce total employment by 500,000 workers by the second half of 2016. But it would also lift 900,000 families out of poverty and increase the incomes of 16.5 million low-wage workers in an average week.

That is the mixed conclusion of an assessment on how raising the minimum wage would affect incomes, employment and the federal budget. The report was released on Tuesday by the nonpartisan Congressional Budget Office, whose views often have a powerful influence on the fate of legislation.

The nuanced analysis provided instant fuel for both supporters and critics of raising the federal minimum wage, a policy heavily favored by Democrats but viewed skeptically by Republicans in Congress.

Republicans contended the policy would be a job-killer, while Democrats asserted it would help alleviate poverty. Economists said both might be right.

And the White House, in an unusual twist, openly disputed the budget office’s math.

Jason Furman, the chairman of the White House’s Council of Economic Advisers, said that the office’s estimate of the potential lost jobs might be too high. In a call with reporters, Mr. Furman said that finding no jobs effect at all would be a “perfectly reasonable estimate.”

The analysis does not reflect “the consensus view of economists,” he said. “Sometimes, you have to have respectful disagreement.”

But the report was embraced by leading Republicans, who have opposed the legislation despite its widespread popularity in public opinion polls. “Raising the minimum wage could destroy as many as one million jobs, a devastating blow to the very people that need help most in this economy,” said Senator Mitch McConnell of Kentucky, the minority leader. “If and when Democrats try to push this irresponsible proposal, they should be prepared to explain why up to a million Americans should be kept from having a job.”

Democratic lawmakers and liberal groups joined the White House in challenging that view. “I haven’t seen Republicans this excited about something that bucked the trend in their favor since the last poll showing Mitt Romney was about to be elected president,” said Brad Woodhouse, the president of Americans United for Change, a liberal advocacy group. “But sorry to rain on their parade — one report does not a trend make.”

The budget office found that lifting the federal minimum wage, currently $7.25 an hour, would have a complicated effect on the labor market, acting as a boon and a burden for businesses and workers.

Over all, the budget office estimated that lifting the minimum wage to $10.10 and indexing it to inflation would reduce total employment by about 0.3 percent, or 500,000 workers. But it cautioned that the estimate was imprecise, with the job losses likely to fall in a range from practically nothing to one million.

The proposal would result in winners and losers among the low-wage workers it would target, the report found. Some businesses, squeezed between increased costs and the inability to raise prices or sell more goods, would hire fewer low-wage workers because of a higher minimum wage, the report said.

But increasing the minimum wage would bolster the earnings of about 16.5 million workers: providing $5 billion a year more for families living in poverty, $12 billion a year more for families earning from one to three times the poverty threshold.

Several top labor economists said on Tuesday that the budget office was overstating the proposal’s effect on the job market. Lawrence Katz of Harvard, for instance, said that the budget office had used “a lot of off-the-shelf estimates” of the jobs effect, and that if it had emphasized findings from higher-quality studies, it would have found a smaller or negligible impact on total employment.

More conservative economists said that the profession had long viewed raising the minimum wage, like any increase in price, as having an effect on the demand for jobs.

“The Congressional Budget Office confirms the president proposes an unprecedented increase in the minimum wage that will cost hundreds of thousands of jobs,” said James Sherk, who analyzes the labor markets for the Heritage Foundation, a right-of-center research group.

Liberal economists said that quibbling over the jobs numbers neglected a central finding in the report: that many workers would benefit from an increase in income.

“The C.B.O. chose a higher number than I think reflects the best work, but they’re not way off the reservation,” said Jared Bernstein, a former Obama administration economist now at the Center on Budget and Policy Priorities. “Even if they’re right, the beneficiaries far, far outweigh the people who are hurt by this.”

The budget office analyzed two proposals in its report. The first would increase the minimum wage to $10.10 by mid-2016 and would tie it to the Consumer Price Index, so that it would increase with inflation over time. It would also increase the minimum wage for workers who receive tips for services.

The second proposal would increase the minimum wage to $9, without any indexing for inflation. That would have much smaller effects, the budget office found. It would reduce employment by 100,000 workers by the second half of 2016, and push about 300,000 people above the poverty line.

The higher minimum wage would reduce employment in two main ways, the budget office report said. Businesses facing higher labor costs would raise prices, passing those higher costs on to their customers. That would lead their customers to cut back on their purchases, meaning that businesses would need fewer workers.

Raising the minimum wage would also make hiring low-wage workers more expensive relative to other investments, like new machinery. Businesses might then reduce their use of low-wage workers and shift their spending toward other things, like automated systems.

But a higher minimum wage would offset at least part, if not all, of that effect by helping increase spending by lower income workers throughout the economy.

Read the entire article here.

Tax subsidies and incentives to work

From the NYT “Economix” Blog” by Uwe Reinhardt:

Last week a brouhaha erupted over a passage in Appendix C of a Congressional Budget Office report, Budget and Economic Outlook 2014-24.

In that appendix, “Labor Market Effects of the Affordable Care Act: Updated Estimates,” the agency reported its estimate that the Affordable Care Act “will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor – given the new taxes and other incentives they will face and the financial benefits some will receive.”

The agency estimated this reduction in hours worked as the “full-time-equivalent workers of about 2 million in 2017, rising to about 2.5 million in 2024.” The agency hastens to point out that this number does not represent jobs no longer offered by employers but, for the most part, the decision of employees not to work.

Opponents of the Affordable Care Act and many news reports quickly seized upon this estimate, characterizing it as “dropping a bomb” or having “nuked” Obamacare. Joseph Rago of The Wall Street Journal attributed this interpretation of the data to an exposé by my fellow Economix blogger Casey B. Mulligan.

Commentators supporting the Affordable Care Act pointed out that the pro-growth effect of the law’s lower health costs would swamp any antigrowth effects from a lower labor supply and that ifsome Americans decided to work less, given the incentives they face, they would yield available jobs to others willing to work but unable to find a job, which on balance would be a good thing.

Read the entire article here.

Congressional politics stands in the way of looming student loan crisis

The coming student loan debt crisis has been widely discussed but it remains low on the list of problems facing Congress and the priorities of the American people. In fact, political leaders are trying to dodge a proverbial bullet on the issue. On July 1 the House and Senate voted to raise the interest rate on subsidized student loans from 3.4 to 6.8 percent, a move that economists say will hamper students’ efforts to repay loans in a jobless economic recovery and educators say will hurt low-income students trying to get an education.

Congress returns from its July break this week with egg on its face, and is franticly searching for a way to fix the problem retroactively. Although the recent vote to double interest rates affects only newly issued federally subsidized loans, according to the Congressional Budget Office this represents 25 percent of all such loans

The prevailing idea has been to extend the 3.4 interest rate for another year as a short-term fix while politicians struggle with the implications of contributing to a financial bubble that looms on the horizon. However, that plan is going nowhere in the Senate where 42 Democrats have signed onto legislation extending the rate for one year because it is part of a larger package that includes alleged tax increases. House Republicans are opposed to this temporary fix because it is rolled into a bill that contains “permanent tax increases,” which is nothing but the closure of a loophole for inherited retirement accounts. In short, they would rather appear in favor or raising interest rates on student loans so that the super-rich can continue to exploit a tax loophole, than search for a bipartisan solution.

Another plan that has recently been floated with the bipartisan support of six senators would reform the federal student loan system entirely, and perhaps depoliticize it, by pegging loans to 10-year Treasury notes with an additional 1.85 percent cap. The proposal from Sens. Joe Manchin (D-WV), Tom Carper (D-DE), Angus King (I-ME), Lamar Alexander (R-TN), Richard Burr (R-NC) and Tom Coburn (R-OK) also includes a key provision demanded by President Obama that is missing in the House bill:  namely, locking in interest rates for the life of the loan so that sudden rate increases rates would not lead to crippling payments for workers later in life. However, a weakness of the plan is higher rates for graduate student loans, raising the question whether it will act as a disincentive for students and workers seeking graduate degrees to improve their skills.

Yet, the problem goes much deeper than the Congressional vote to double interest rates and the political backlash it has created among educators and young voters. Paul Combe, president of American Student Assistance, claims that Washington is, in part, missing the point. The looming bubble concerns loans that are already in repayment but workers are suffering from a deficit of good paying jobs in a struggling economy. Student loan payments are further undercutting effective demand as workers see larger portions of their income going to repayment instead of consumption.

“If we have somebody who gets into income-based repayment after they leave school, the interest rate isn’t that big of a deal. It’s how they get that monthly payment,” Combe said.