Minimum Wage, Part 5
New CBO report is
unhelpful and misleading
10 Jan 2007 in Regulatory Economics, Regulatory Policy, Information Quality, Legislation
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
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
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.
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:
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
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