Transcript: Remarks by CBO Director Douglas Elmendorf on the impacts of minimum wage increase on employment – Feb. 19, 2014

Partial transcript of remarks by Douglas Elmendorf, Director of the Congressional Budget Office, on the effects of raising the minimum wage on employment at the Christian Science Monitor breakfast on Feb. 19, 2014:

In a profile of you in Washingtonian, one of your predecessors, Robert Reischauer, was quoted as saying, “If the folks who invited you to the dance want to drive you home at the end of it, you haven’t done your job.” Based on the reactions to the CBO’s studies on the labor market effects of the Affordable Care Act and yesterday’s report on the impact of the minimum wage increase, you seem to be doing your job.

Yesterday, on a phone call with reporters, Betsey Stevenson of the Council of Economic Advisers, said that CBO was “not fully appreciating how much the literature has moved” on spillover effects of raising the minimum wage. What made you and your team take the approach that you did estimating a loss of about 500,000 jobs and benefiting about 16.5 million workers when according to the CEA the bulk of economic studies have concluded that the effects on employment on minimum wage increases in the range now under consideration will likely to be “small to non-existent”?

Douglas Elmendorf:
I don’t want to respond directly to what the CEA has said. We try to talk about our analysis and let people talk about theirs. But I want to be clear that our analysis of the effects of an increase in the minimum wage is completely consistent with the latest thinking in the economics profession.

We did an exhaustive review of the literature in this area, up through reports that were released last month. A very large number of studies, as you know, that have reached a range of conclusions, and the studies all have strengths and weaknesses. And in the long methodological appendix to our report, we talk about some of the characteristic of studies that made them more or less compelling in our view.

But a balanced reading of the set of research studies in this area led us to conclude that an increase in the minimum wage would probably have a small negative effect on employment, but there was substantial uncertainty around that estimate as we reported.

Naturally, some economists focus more on studies that show smaller employment effects; other economists focus on studies that show larger employment effects.

Our responsibility for the Congress is to report the middle of the distribution of possible outcomes and of possible the range of likely outcomes. That’s what we’ve done in this report.

If you try to compare what our analysis to what other economists have said, it’s a little hard because most other economists don’t have to put numbers behind the words of their evaluation.

But, we have looked at some of these other statements by economists. One place one might look is a survey conducted by economists at the University of Chicago. They asked a panel of leading economists from across the country questions on economic policy on a regular basis, and when they asked that panel about the effects of raising the minimum wage to $9.00 an hour a year ago, about half of the economists who had some answer to that question said that that increase to $9.00 would make it “noticeably harder” for low-skill workers to find employment, and about the other half of the economists responding to that survey said that it would not make it noticeably harder for low-wage workers to find employment.

In our analysis of the effects in raising the minimum wage to $9.00, we give a range from reduction in employment of 2.5% to a slight increase in employment.

We don’t know exactly what the response to that survey meant by “noticeably harder” but if noticeably harder means that 2.5% reduction in employment, then our range of minus 2.5% to a slight increase seems to us to map quite nicely into half of those economists’ thinking it would be noticeably harder and half thinking it would not be.

Another place one might look is to the letter signed by several hundred economists advocating the increase in minimum wage. Of course, that is not a random sample of economists. That is a set of economists who support raising the minimum wage, and they are presumably disproportionately those who think that the effects on employment would be smaller. But nonetheless, I’m not sure we would disagree with their statement of the evidence. What they said is that – see if I can find my copy of it – what they said is that there would be “increases in the minimum wage have had little or no negative effect on the employment of minimum wage workers”. Well, again, they don’t say what they mean by “little” in that statement. The increase in minimum wage that we looked at that is most analogous to the past increases studied in the research literature is this $9 increase. So, we estimate a range from a 2.5% reduction to a slight increase. Again, without exactly knowing what “little” means in this context, the range that we have looks to me like a little reduction to essentially no change.

Now, the last thing I’ll say on this is that we also look, as you know, at the effect of raising the minimum wage to $10.10 in addition to looking at the effects of raising the minimum wage to $9. And we estimate that raising the minimum wage to $10.10 would have a much larger effect on employment, but still I think a small effect but larger than the effect of raising the minimum wage to $9. And that difference is for good reasons. The first point to recognize is that raising the minimum wage to $10.10 would just affect a lot more people than raising the minimum wage to $9 so we estimate the number of people whose wages would go up would be much larger for the $10.10 raise than a $9 raise – 16.5 million as opposed to 7.5 million. So there’s many more people who are affected.

But also we think there would be a larger percentage reduction in employment for that larger pool. We offer a number of reasons in the report for expecting that effect to be somewhat larger. Let me just highlight two of them.

One is that this increase to $10.10 that we talked about modeled after some legislation being considered by the Congress would be indexed for inflation at that point. So that’s rather different from the past experience with the federal minimum wage and with many of the raises at state levels where wages have been raised in nominal terms and then fixed at a nominal minimum wage – fixed at a higher nominal level that’s then eroded in real terms – inflation-adjusted terms – over time. This $10.10 increase we modeled would be adjusted for inflation. So, it would just be higher nominally to start with but higher on an ongoing basis, and we think that would induce larger responses by firms.

But secondly, this increase to $10.10 cuts much more deeply into the distribution of wages than an increase to $9. And you can see this on the cover of the report. The increase to $9 puts the minimum wage back up near the 10th percentile of workers’ wages. An increase to $10.10 puts the minimum wage much higher than that – higher relative to the distribution of wages than has been at any point in at least the 40 years that we cover here.

And by cutting further into the wage distribution, both because it’s a large increase and because it’s starting from the minimum wage at the level that it’s at cutting so far into the distribution means that employers will face a larger shock in their costs and have more incentive to incur the adjustment cost that would be needed to make larger changes in their workforces.

So we think there are very good economic reasons and others as I say in the report for why the $10.10 indexed increase have a bigger effect on employment than the increase at $9. And the $9 increase that we analyzed, which is the increase that’s most comparable with what most economists have analyzed in the past, we think our estimates are completely consistent with the balance of the evidence.

On your budget and economic outlook, you estimated that as a result of the Affordable Care Act, there would be a reduced demand for jobs to the tune of about 2.5 million by the end of 10 years. And then in this minimum wage report, you’re talking about a reduced demand by employers if the minimum wage is raised. Is there a kind of interaction or overlap between on the one hand people demanding less work and on the hand employers having less demand for workers if the wage goes up?

Douglas Elmendorf:
Our analysis of the Affordable Care Act’s effects on the labor market under current law and our analysis of the prospective effects of a minimum wage increase on the labor market is more or less independent. Labor market is affected by lots of forces all the time, and federal policy is one – usually fairly small – piece of what’s happening.

So, for the Affordable Care Act, we estimate that there would be reductions in the supply of labor because the Affordable Care Act reduces the incentive to work by a little bit through a variety of channels. I think you should think of it as more or less a separate question from what the effect the minimum wage increase would be.

As you know, the minimum wage increase is really affect employers’ demand for workers, but they’re different sorts of effects. If this minimum wage increase…were to pass into law, then our future projection of the economy would take on more of that as well as take in more of the Affordable Care Act as well as other features of the tax code as well as what’s going on in the economy. But there’s no particular interaction between them.

…Is there a multiplier effect you factor into…?

Douglas Elmendorf:
…In our analysis of the effects of raising the minimum wage, we have focused on the period at the end of 2016 because that’s the point in which both minimum wage increases would be largely phased in or would be fully phased in. And our estimates of the employment effects – the estimates do incorporate the effects of re-distribution of income down the income scale toward people who would be more likely to spend that money and thus the boost in demands for goods and services and the boost in employment that would come from that. And our quantitative estimates are the netting out of that effect with the other effects that we talked about.

The report yesterday analyzed two different minimum wage levels that are well above $7.25 and said they both would more likely than not reduce jobs. I’m curious in the proposals that are out there, is it possible we’re missing a happy medium? Is it possible that there’s a minimum wage hike based on what you know, the literature you’ve reviewed, that would have a roughly net zero effect on employment but still increase people’s paychecks, like $8.00 or $8.50?

Douglas Elmendorf:
We have not looked at other possible increases so I don’t want to speculate too much. But I would just say there’s no particular trick in the analysis we’re doing here and what economists have found for past minimum wage increases. We estimate that if the minimum wage were raised that the vast majority of the people who would be affected by the increase would keep their jobs and receive higher wages. So by our estimates – the middle point of these two estimates – something like 97% or 99% of the people who would be affected by the increase in the minimum wage would receive higher wages and their families’ income would be higher as a result. But at the same time, 1% to 3% of people would not be able to find employment. So, I think as you move to larger and larger increases in the minimum wage, from $0 up to $9 or $10.10 or beyond that, you’re likely to find progressively larger numbers of people who benefit from raising wages and progressively larger reductions in employment.

To clarify, the assertions made by Democrats and those on the left after your report came out and Pelosi said your report’s conclusions contradict the consensus among hundreds of America’s top economists, you disagree with that assertion. And second question, do you think that whether…economist said that increases in the minimum wage have little to no effect on the employment of minimum wage workers, you seem to think that your report kind of lined up with that assessment by the economists. Do you think a loss of 500,000 jobs would equal little or no negative impact on unemployment?

Douglas Elmendorf:
So, I’m not going to speak directly to what Leader Pelosi has said. I can only speak about our analysis. And as I said before, our analysis is quite consistent with the latest thinking by economists.

What I noted about this letter and this survey that I referred to is that those economists don’t put numbers to their words. So it’s hard to know exactly what people meant by “little to no effect”. It’s hard to know exactly what people meant in this survey by “noticeably harder” to find a job.

Our estimates for a $9 minimum wage, which as I said is the sort of increase that’s most consistent with the increases that economists have studied in the past in terms of the extent of the increase and how far into the wage distribution it cuts, our analysis of that proposal suggests that the decline in employment would be between 2.5% and a slight increase. And I think a 2.5% decline to many people would be a “small decline” and a slight increase would be consistent with their being no effect roughly. So, I don’t think one can tell from that statement in this letter. We can’t be sure exactly how that set of economists would take our results, and moreover, as I noted, that is not a representative sampling of economists. So, I don’t think you can tell anything from that particular wording that is different from what we’ve done, nor is that wording prove those economists would agree with what we’ve done.

What we have done ourselves is to do a very careful reading of literature and we have put weight – some weight – on a wide range of results. Naturally, economists who put more weight on certain studies than others will reach different conclusions. Some economists will undoubtedly find our estimates of the employment effects to be larger than they would pick themselves, and other economists would find our estimates of employment effects to be smaller than they would pick themselves. Our job is to provide the Congress with a balanced reading and we’ve done that.

I’m wondering if you could put a percentage to what the chances that the impact on unemployment at the $10.10 range could be far lower, say 100,000?

Douglas Elmendorf:
Well, so the range that we provided for an increase of the minimum wage to $10.10 is from a very slight decrease in employment to minus a million workers. And we say that we’ve constructed this range to capture as best as we can judge two-thirds of the distribution of possible outcomes. So that means, in our judgment, there’s a one-sixth chance that the effects of raising the minimum wage to $10.10 would be a bigger decline in employment than a million, and a one-sixth chance that raising the minimum wage to $10.10 would either not reduce employment at all or would increase employment, and a two-thirds chance that the effect would be between a slight decrease and a decrease of about a million workers.

Did the [response] from Democrats surprise you at all? Or was this something that you expected?

Douglas Elmendorf:
For much of the work that we do, there’s a range of reactions. And we take great pains in doing analysis to read widely ahead of time and to consult with people with a wide range of views. If you look at the people we list at the end of our document whom we spoke about this work, you’ll see from knowing their own work that they came to this question with very different sets of views of what would happen. So we understand that there’ll be a range of reactions among professional analysts outside of CBO and among policymakers and commentators outside of CBO. It doesn’t surprise us nor does it have any effect on the work that we do.


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