President Obama has turned his call for increasing the federal minimum wage to $10.10 per hour into an election year rallying cry for Democrats. But a report by the Congressional Budget Office has severely undermined his policy arguments.
Coming on the heels of a CBO analysis that Obama’s signature health care law will create a disincentive to work, the Feb. 18 report contradicted Obama’s key claims about the effect of raising the minimum wage on jobs and poverty.
“The opponents of the minimum wage have been using the same arguments for years, and time and again they’ve been proven wrong,” Obama declared in a Feb. 12 speech pushing the increase. “Raising the minimum wage is good for business, and it’s good for workers and it’s good for the economy.”
Obama went on to add that, “Just last month, 600 economists, including seven Nobel Prize winners, wrote the leaders of houses of Congress to remind them that the bill before Congress would have little or no negative effect on hiring, on jobs.”
The CBO analysis took into account Obama’s argument that if people have higher wages, their added spending power would boost demand for goods and services, thus helping the economy. But on a net basis, the CBO still projected that raising the minimum wage to $10.10 would reduce employment by 500,000 workers.
According to the CBO’s broader range estimate, in a best-case scenario, the hike would lead to only a “very slight decrease” in employment. But in a worst-case scenario, it could mean the loss of one million jobs.
During his speech, Obama also said that, “Rais[ing] the federal minimum wage to $10.10 wouldn’t just raise wages for minimum-wage workers, its effect would lift wages for about 28 million Americans.”
In contrast, the CBO said that 16.5 million workers — not 28 million — would receive a raise if the minimum wage were increased, and that “increased earnings for low-wage workers resulting from the higher minimum wage would total $31 billion.”
However, the CBO predicted that the increase would be paired with lower effective earnings “for the people who became jobless because of the minimum-wage increase, for business owners and for consumers facing higher prices.” Thus, “Once the increases and decreases in income for all workers are taken into account, overall real income would rise by $2 billion.”
In one of his oft-repeated lines, Obama also reiterated his belief that “in the wealthiest nation on Earth, nobody who works full-time should have to live in poverty.” He claimed that increasing the minimum wage “would lift millions of Americans out of poverty immediately.”
But the CBO report said that “just 19 percent” of the increased earnings from a higher minimum wage “would accrue to families with earnings below the poverty threshold, whereas 29 percent would accrue to families earning more than three times the poverty threshold.” As a result, the CBO estimated the hike would move 900,000 people out of poverty of the 45 million who are projected to be in poverty under current law. But it wouldn’t accomplish this “immediately” — the CBO estimate applies to the second half of 2016.
Obama has presented hiking the minimum wage as a no-brainer that would boost the economy, increase wages and immediately reduce poverty without adverse effects. The CBO has estimated that in reality, the action would raise unemployment among lower-income workers, deliver most of its benefits to families living above the poverty level and have offsetting adverse effects on businesses and consumers.
To the extent that it will reduce poverty, according to the CBO, the effect will be less significant and less immediate than what Obama has claimed.
