A Congressional Budget Office report out Tuesday indicates that President Barack Obama’s plan to raise the Federal minimum wage to $10.10 an hour by 2016 could cost the economy 500,000 jobs.
The nonpartisan budget watchdog said that the minimum wage hike would boost the income of about 16.5 million workers throughout the Nation, but not without some economic drawbacks.
“This report confirms what we’ve long known: while helping some, mandating higher wages has real costs, including fewer people working. With unemployment Americans’ top concern, our focus should be creating — not destroying — jobs for those who need them most,” a spokesman for House Speaker John Boehner (R-Ohio) said of the report.
CBO explained the employment consequences thusly:
According to conventional economic analysis, increasing the minimum wage reduces employment in two ways. First, higher wages increase the cost to employers of producing goods and services. The employers pass some of those increased costs on to consumers in the form of higher prices, and those higher prices, in turn, lead the consumers to purchase fewer of the goods and services. The employers consequently produce fewer goods and services, so they hire fewer workers. That is known as a scale effect, and it reduces employment among both low-wage workers and higher-wage workers.
Second, a minimum-wage increase raises the cost of low-wage workers relative to other inputs that employers use to produce goods and services, such as machines, technology, and more productive higher-wage workers. Some employers respond by reducing their use of low-wage workers and shifting toward those other inputs. That is known as a substitution effect, and it reduces employment among low-wage workers but increases it among higher-wage workers.
While the CBO estimates that the majority of Americans who are currently in low-wage jobs would benefit from the hike, those projected to be most negatively affected include the Nation’s most vulnerable low-skilled workers. That would create a small but noticeable jump in the number of Americans who rely completely on government aid to survive, based on the report.
At the same time, low-wage Americans who currently rely on some Federal benefits to get by and whose employers can justify keeping them on the payroll at a higher cost, could be able to completely remove themselves from the government dole.