How Helpful is Raising the Minimum Wage?

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While poverty is a serious problem, is forcefully raising the minimum wage really the best way to solve it? Are their better ways?

USA Today reports the political controversy over recent findings from the Congressional Budget Office (CBO) on the proposed federal minimum wage increase. The CBO examined what increasing the minimum wage to $10.10 an hour would do to jobs. The good news is that it could help pull 900,000 workers out of poverty. The bad news is it could cost 500,000 jobs. USA Today explains that the cost comes from foregoing “new jobs as employers are expected to reduce workforces to make up for higher wages.”

Those in favor of the wage increase seemed surprised by the CBO analysis, since many economists have been saying such a raise would have no negative effect on employment. Some suggest the report doesn’t properly consider positive variables:

“Furman and Betsey Stevenson, also a member of the Council of Economic Advisers, said the CBO analysis does not take in to account the impacts of higher wages on increasing productivity, reducing turnover and absenteeism and improving worker output. ‘I think that that understanding has moved employment effects to zero,’ she said, ‘I think CBO didn’t fully appreciate that in their review.'”

Appreciate it or not, suppose for a moment that the CBO is exactly right. Is it a reasonable exchange to raise 900,000 people out of poverty at the expense of 500,000 people going without jobs? At first glance, this sounds like a net gain of 400,000 decent paying jobs. But does it really stop there? Would there be deeper ripple effects of shifting wages and job losses on the economy? Then again, can anyone fully comprehend the hidden implications of a forced wage increase?

Suppose the effect on jobs is zero. What about employees who are already making $10.10 an hour? Would raising the minimum wage mean their salaries and purchasing power just went down? Or would the employer have to ratchet up their wages, too, to make up for the difference? How far up the employee line should this continue, in order to be just? Will this bring higher prices and eventually leave people back where they started in purchasing power?

While poverty is a serious problem, is forcefully raising the minimum wage really the best way to solve it? Are there better ways?

>>Source: Davis, Susan. “CBO report: Minimum wage hike could cost 500,000 jobs.” USA Today. 18 Feb. 2014.

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