Minimum Wage, Part 5
New CBO report is unhelpful and misleading

10 Jan 2007 in , , ,

The Congressional Budget Office has released a study that purports to analyze the effects of raising the federal minimum wage from $5.15 to $7.25 per hour. The study, which was prepared in response to a request from Sen. Charles Grassley, compares the effects of the raise in the federal minimum wage on poor families with the alternative policy of raising the Earned Income Tax Credit.

If the policy objective is helping the working poor, the EITC is attractive because it is better targeted toward that purpose. CBO says 80% of minimum wage workers are not poor.

But the EITC has at least two significant political defects. First, it is a federal budget expenditure (which adds to the fiscal deficit) rather than an employer mandate (which to Congress is "free"). Second, under the new PAYGO rules established by the leadership of the 110th Congress, an increase in the EITC would require a compensating reduction in expenditures or a tax increase. An increase in the federal minimum wage requires neither.

In any case, a careful reading of the CBO report indicates that it is an unreliable guide to the effects of raising the federal minimum wage. It violates the objectivity standards of the federal Information Quality Act. CBO is exempt from these standards


Add to Technorati Favorites

The CBO report raises issues about both data and methods.


For data CBO relies on wage and family income data obtained from the Bureau of the Census' Current Population Survey for 2005. According to CBO, CPS data indicate that 1.2 million workers are paid at or below the current minimum wage and 11.6 million workers are paid a wage between the current federal minimum and the proposed $7.25 per hour rate (Table 1). The Bureau of Labor Statistics reports 1.9 million workers paid at or below the federal minimum. These figures differ by a factor of 1.6 and need to be reconciled.


CBO assumed that raising the federal minimum wage to $7.25 per hour would cause all workers currently paid less than this amount to see their wages increased to equal the new minimum.

To estimate the impact of the hypothetical wage rate increase on the family income of workers, CBO assumed that all hourly workers whose wage rate was between $5.15 and $7.24 per hour would have been paid exactly $7.25 per hour had the hypothetical minimum wage rate been in effect. CBO further assumed that workers whose wage rate was $7.25 or higher would have been unaffected by the hypothetical increase in the minimum wage. For this tabulation, CBO assumed that no changes in employment or hours would have resulted from the higher minimum wage rate (footnote omitted, p. 1).

This is false. The market demand for inexperienced or unskilled labor is elastic -- that is, the quantity of such workers demanded in the labor market declines as their price increases. Mandating higher wages will result in additional unemployment; the only question is how much.

CBO acknowledged this in an opaque footnote that is likely to be ignored:

The economics literature includes numerous studies on the employment effects of increases in the minimum wage, which indicate a wide range of potential impacts.

In short, CBO has assumed away the most important part of the analytic problem, which is estimating how much unemployment would occur as a result of raising the minimum wage. This assumption makes CBO's entire analysis invalid and unreliable. to be valid and reliable, projections about the amount of new money in the hands of the working poor must distinguish between those who keep their jobs and those who lose them.

Like Congress generally, CBO is exempt from the federal Information Quality Act and OMB's implementing guidelines because it is not part of the Executive branch. Thus, CBO is not required to "ensur[e] and maximiz[e] the quality, objectivity, utility, and integrity of information (including statistical information)" they disseminate.

If CBO were covered by IQA, this report would be fodder for an error correction petition. Indeed, if CBO were covered it would be required to have pre-dissemination review procedures sufficient to prevent reports such as this from being disseminated.


Add to Technorati Favorites

 Copyright 2006 Neutral Source | About