The Congressional Budget Office recently released a report concerning the effects of a rise in the minimum hourly wage, and it had some good news to share, as well as some not-so-good news.
On the one hand, raising the minimum wage from the current $7.25 per hour to $10.10 would increase income for approximately 16.5 million workers by 2016, and lift about 900,000 out of poverty. Increased earnings would total $31 billion, although not all of that amount would be funneled to low-income households, since not all low-wage workers live in poor households.
On the other hand, it will likely cut the number of people working by quite a lot -- anywhere between a smidge and one million, averaging out to approximately 500,000 workers by 2016.
An alternate scenario
The CBO seems to be comparing two minimum-wage increase scenarios, the one above, and a $9 per hour raise, also envisioned as being fully executed by 2016. This plan would increase the hourly wage in two steps rather than three: one next year, and the second step in 2016. Unlike the $10.10 scenario, which also includes a raise sometime this year, the $9 rate would not be annually adjusted for inflation.
Since the reduced minimum wage hike would affect many fewer workers, the impact would be much less, affecting only 7.6 million workers, compared with the higher rate's 16.5 million. The CBO estimates that the decrease in the number of workers by 2016 would range from a few to 200,000, with an average of 100,000 leaving the work force or being unable to find a job -- quite a difference from the $10.10 strategy.
Which is better?
Assuming one or the other of these two plans will become law, which would be the better choice, both for workers and the economy?
As far as loss of employment goes, the $9 version would supposedly result in only 20% of the total job loss that would be experienced under the $10.10 plan, which increases its attractiveness significantly. In other measures, however, the lower wage level can't match the benefits that could accompany a minimum wage hike to more than $10 per hour.
For example, the change in real income for families whose current income falls below the poverty level will increase by $5 billion under the higher-wage plan, while the alternative would register a change of only $1 billion. For those whose income is now between one and three times the poverty level, the change in real income for the $10.10 scenario would increase by $12 billion, compared to only $3 billion for the $9 per hour plan.
The combination of a rate hike in 2014, the extra $1.10 per hour, and the indexing to inflation all create a situation that makes the higher-wage scenario more beneficial to low-wage workers. This plan also includes a rise in the minimum cash wage paid to tipped workers -- which still stands at $2.13 per hour, where it has been since 1991. By a series of increases through 2019, the subminimum wage would eventually equal 70% of the $10.10 minimum wage.
While the loss of a possible half-million jobs is still troubling, analysts like Jason Furman, Chair of the Council of Economic Advisers, don't see that kind of job loss occurring. In a recent post on the White House blog, Furman noted that the CBO's estimates of jobs lost doesn't jibe with the overall expert opinion that a measured rise in the minimum wage will likely have a negligible effect upon employment.
There's no doubt the groundswell of support for an increase in the minimum wage is gaining momentum, with two-thirds of those polledby ABC News and The Washington Post saying they were in favor of such a move, and indicating they did not believe it would increase layoffs.
Unfortunately, congressional support for the concept doesn't seem quite as strong, and Senate Majority Leader Harry Reid has already put off discussion of the matter until late March, at least. As it stands now, President Obama has raised the federal contractor rate to $10.10 by executive order -- while the rest of low-wage working Americans continue to wait.
Don't earn the minimum return
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.