The CBO published a worrisome analysis of the minimum wage on Tuesday. The study estimates that, in the short run, raising the minimum wage to $10.10 per hour will lift 900,000 people out of poverty, presumably adults and their children, but reduce employment by 500,000 workers. The study cautions “the effects on total national income of an increase in the minimum wage differ in the long term…In the long term…reduction in the workforce lowers the nation’s output and income.”
The report warns that raising the minimum wage is a highly ineffective way to reduce poverty. It points out “just 19% of the $31 billion [of income transferred] would accrue to families with earnings below the poverty threshold,” while “29% would accrue to families earning more than three times the poverty threshold.” Because families in poverty supply very few hours of work, the CBO expects that only $300 of cash will be transferred on average to poor families. The CBO expects that earnings transferred to “low- and moderate- income workers” will be taxed at a 32% marginal tax rate because government benefits are reduced as poor families earn more, so only $200 of net cash would be transferred, in large part, because minimum wage workers tend not to work full time. The study makes no mention of a prior CBO report that estimated the marginal tax rate for a single mother working full time at the minimum wage (i.e., earning $15,000 to $20,000 per year) at 65% to 95%, which includes the expected reduction in government benefits.
Tuesday’s study acknowledges that it would be far more efficient to aid poor families using the Earned Income Tax Credit (EITC) than increases in the minimum wage. In a footnote, the CBO admits “the cost to employers of the change in the minimum wage was much larger [emphasis mine] than the cost to the federal government of the change in the EITC.” In another prior report, the CBO estimated that transferring a dollar of income to a family in poverty requires transferring almost $7 of income through the minimum wage versus $1.70 using the EITC.
Given the CBO damning analysis, one can’t help but wonder why in the run-up to the 2016 elections, Democrats would propose increasing the minimum wage rather than increasing the EITC. The report seems to offer a clue. In a footnote, it warns, “At the same time that the proposed increases in the minimum wage would take effect, the Affordable Care Act’s requirement that many employers provide health insurance (or pay a penalty if they do not) will impose an additional cost on employers for some low-wage workers who do not currently have employment-based health insurance. CBO expects that the cost will ultimately be borne by workers through lower wages.” An increase in the minimum wage, despite being a highly inefficient way to help the poor, would prevent this from become more visible.