CBO Report on the 2014 $10.10 Raise in the Minimum Wage Proposal
President Obama's Call to Congress to Raise the Minimum Wage
The CBO Has Spoken ... Out of Both Sides of Their Mouths
EARLY IN FEBRUARY 2014, PRESIDENT OBAMA signed an Executive Order raising the minimum wage for employees on Federal contracts to $10.10 per hour. He did this to pave the way for Congress to do the same thing for the rest of America; something the Democrats favor and the Republicans oppose. The figure $10.10 is chosen because at that rate, it will provide enough income to keep most people above the poverty line which is a major Democratic objective. For Republicans, however, that goal is less important than the burden the higher wage puts on business; which, of course, is one of the philosophical differences between the two Parties.
This week, the impartial Congressional Budget Office (CBO) stepped into the battle field handed each side substantial talking points to support their view of the world. Round One, like it did for the CBO report on Obamacare, went to the Republicans. All anyone could talk about was the midpoint estimate of 500,000 low-wage jobs lost (.3%) after the 2016 implementation of the $10,10 minimum wage. That number, along with the acronym CBO is going to be plastered on millions of Republican political ads over the next eight months, no doubt about it.
Like the underlying good news with the CBO Obamacare report which ultimately got the Republicans to pull in their claws regarding the supposed, but non-existent "job loss" from the ACA, the Democrats have a lot to crow about as well once the initial furor is over with. And that is the estimated 900,000 (2%) low-wage individuals who will be removed from the poverty roles! This number will also be replicated, in association with the CBO, a million or more times in Democratic political ads as well/
Well, which is right? They both are, of course. So the question comes down to, which is more important to you, pulling 900,000 people out of poverty, or costing 500,000 people their jobs for a while, 5% of whom have other jobs, according to the CBO?
IT REALLY IS COMPLICATED! (Even if you, the politicians, or I don't understand the chart below, the CBO does)
I REALLY HATE IT WHEN COMPLEX ANALYSIS IS REDUCED TO A BUMPER STICKER by politicians and pundits who don't have a clue as to what they are talking about; all it does is highlight how uninformed they are to those in the know. What the CBO accomplished for the minimum wage analysis is similar to what I did for the Department of Defense back in the day, we had the same training and education. I skimmed through the CBO report and was properly impressed.
With the Republicans misleading you with the 500,000 job loss figure and the Democrats doing the same thing with the 900,000 people pulled out of poverty number; the CBO report might as well be shredded as a worthless document if that is all it is used for. But that would be a shame, because it was a quite comprehensive report, fairly presented. I had in mind many factors that needed to be taken into account for their analysis to be complete before I started reading it, and they were all there. While I didn't study their methodology in detail, the fact they covered the why's and wherefore's told me these had been factored into their calculations.
When I titled this section "It's Complicated", I meant it ... it is complicated. There are so many variables involved, it will make your head spin as well as hurt. Yet, both the Democrats and Republicans will try to make you believe in ten words or less that it is as simple as pie (I have never thought making a pie was simple either, where do they get these sayings?) Republicans will say, raising minimum wage automatically costs jobs, shuts down businesses, or prevents them from starting up. Well, at least for the latter two complaints, not really; the CBO marginalized those two possibilities. They even had a caveat for the former, most likely complaint.
Consider this statement,
"As with any such estimates, however, the actual losses could be smaller or larger [than 500,000]; in CBO’s assessment, there is about a two-thirds chance that the effect would be in the range between a very slight reduction in employment and a reduction in employment of 1.0 million workers..."
Now, 2/3rds is what is called one standard deviation, if the distribution of estimates are normally distributed. Many things dealing with humans or large numbers of instances can be normally distributed, so, without actually checking out their mathematics, I will assume it is. With this assumption, we know that 66.7% (otherwise known as 2/3rds)of all occurrences of samples of a population show up withing one standard deviation of the mean.of a normal population. In our case, the mean is 500,000 people, and according to the CBO, so is one standard deviation.
Given that, I pulled out by handy-dandy Excel spreadsheet, drew 1000 normally distributed random numbers with a mean of 500,000 and a STD of 500,000, grouped the results in buckets of 75,000 and got Chart 1 below.
Minimum Wage Job Loss Possibilities
WHAT IS THIS CHART TELLING US? Something Republicans don't want you to know, for sure. Along the bottom of Chart 1, are a range of possible actual job losses, given an increase in minimum wage to $10.10. Which one it will be won't be known until it really happens. The CBO is estimating 500,000 BUT has put a very wide range of possible outcomes around it. So wide, that the probability that it will be less than 500,000 is greater than it will be more than 500,000. Now, the CBO doesn't say this, but it is apparent from the chart itself and is an artifact of the standard deviation they chose, one that is equal to the mean.
When that happens, that means some of the estimates on the low side are negative, but because we can't have negative job losses (which would be job gains) these results would be counted as zero job loses; that is why the 0 - 50,000 job loss bracket is so high, it has all those negative numbers in it that would have normally fallen outside the 67% range. This is why the odds are skewed toward less job losses in my opinion.
Notice how the curve, save for the first bin on the left, rises to a peak then falls off. If the numbers were allowed to go negative, the shape you would be looking at would approximate the famous "bell" curve you might have heard about with 67% of the values falling between zero and 1,000,000. The height of each bar is the number of random tries that fell in that particular bin. So, it looks like there were about 50 observations that fell between 450,000 and 500,000 and another 40 observations that fell between 500,000 and 550,000 job losses with each observation being a different estimate of the number of job losses due to the hike in minimum wage when the simulation was run. Well, I only used 1,000 runs; the CBO might have used 10,000 runs or more to develop there estimate for more accuracy.
The point I am trying to get across, however, is that the 500,000 job loss estimate is just ONE of those numbers, granted, the one that will show up more times than any other number over a large number of trials, but that EXACT number has an extremely low probability of occurring. Likewise, job losses between 499,999 and 501,000 is miniscule as well. In fact there is only a 40% chance that the actual job loss will be between 250,000 and 750,000 and a 30% chance it will be less than 250,000 people, but only a 14% chance it will be between 750,000 and 1,000,000 folks; I bet the Republican bumper stickers won't say that, will they? What they may point out, however, is there is a 16% chance the job loss could be larger than one million people.
To put all those eye-glazing numbers into a somewhat more understandable form, let's turn my 1000 random draws into balls, each one with a possible actual job loss number printed on it, and put them into a container. Next, I reach in and draw ten of them out and look at the numbers printed on them. Odds are that 3 of them will have a number less than 250,000 on them; 2 of them will come up less than 500,000, but greater than 250,000; 2 will have numbers between 500,000 and 750,000; 1 or 2 will display job loss numbers between, 750,000 and 1,000,000; and the remainder will be greater than 1,000,000.
Hopefully, I have put the idea that 500,000 people will lose their jobs to bed, they won't; in fact, It is more likely that it will be less than it will be more, it could be zero or it could be over a million, who knows. What is more certain, however, is that people will be pulled out of poverty with a hike in the minimum wage to $10.10.
Will it be the 900,000 the CBO estimates? Probably not, for the same reasons I just covered for job losses. The actual number falls on a continuum that depends on many factors. But, unlike the job losses which most factors work against, mainly the desire to stay in business, being pushed out of poverty is helped simply because a large group of people are earning more money than they were the day before. So even if 900,000 isn't the right number, zero certain cannot be correct, like it could be for job loss, don't you see. Properly structured, this gives, in the end, the Democrats a much stronger argument.
It's Even More Complicated
THERE ARE MANY MORE ECONOMIC LEVERS THAT ARE MOVED with a change of this magnitude, a 37% increase! For example, the CBO estimates, after gains and losses are considered, around 16.5 million people will receive a pay increase which will net about $2 billion in new economic activity. Almost all of this will be returned right back into the economy since most of it will go to low to very low income Americans. Further, millions of dollars more will make its way into the economy through unemployment payments to those who do lose their jobs.
That means a probable increase in profits for many businesses, mainly those who employ low wage employees in the first place such as Wal Mart's, fast-food restaurants, gas stations, etc because those are the places where these people spend their money. Consequently, federal, state, and local revenues may increase due to the increase in incomes, profits, and sales. On the helpful side as well is a decrease in the cost of support in terms of food stamps and other welfare type payments to those who come off the welfare roles.
On the flip side, you will have an increase in unemployment, as we have mentioned, plus an increase in food stamps and other welfare support programs from those who do lose their jobs. But, unlike those who get a pay increase, so long as the economy grows, these new costs should be temporary as those who lost work, find it again. Other potential negatives will be permanently lost positions in some companies who substitute technology or more productive, but fewer, higher paid workers for lower paid employees who have been laid-off. Another is new ventures which don't get off the ground because of the increased labor cost
The CBO estimates around 16.5 million people who currently earn $10.10 or less will benefit. In addition, an unspecified number more who earn more will benefit as well. Of these, the CBO reports 88% of whom are 24 or over. Further, 2.6 million low wage workers were excluded because they weren't covered by the Fair Labor Standards Act (FLSA) or it was estimated they underreported their tips. But, they do include 3.5 million who are also not covered by FLSA yet the CBO feels will still benefit from the increase. As mentioned earlier, the CBO estimates the net effect of an increase in the minimum wage to $10.10 would add $2 billion to the U.S. economy, a number the Democrats should be able to take to the bank as well..
MINIMUM WAGE IN THE USA
Is A Minimum Wage Really the Right Answer?
NO, NOT REALLY, BUT IT IS MUCH BETTER THAN NOTHING. I have argued for awhile now that an expanded Earned Income Tax Credit (EITC) is a much better approach. You see, like its brethren, rent control, farm subsidies, and the like, the minimum wage perturbs the economic system; it doesn't let it operate in the way it is intended to operate. The minimum wage, just as Republicans claim, interferes with rational decision making when it comes to both supply and demand of labor and production because it sets a floor to wages. It puts constraints on the equations used to calculate how much to produce and hire or even whether to go into business at all.
But, if you get rid of minimum wage, as everybody knows, wages will immediately fall, probably a lot to begin with; that is a natural feature of capitalism and the profit motive, it always has been. So, how does one stop a return to subsistence wages that existed back in the 1800s? An expanded EITC is the probable answer, but like minimum wage, the Right will oppose this also. In any case, it isn't going to happen, so we are stuck with the minimum wage.
Recently, the GAP jumped on board saying they will raise their minimum wage employees to the $10.10. Wal Mart apparently doesn't know what they're saying. At one time recently they hinted they might raise their wages, then another part of Wal Mart even more recently says no they aren't, so who knows.
A Personal Example
MY OWN COMPANY, WHICH IS CONSIDERED A SMALL BUSINESS because our annual gross sales are in the range of $5 to 6 million and employ around 35 full-time (at least 35 hours/week) and part-time people plus about 1000 independent contractors. have always paid more than minimum wage, generally $9 to $12/hr, depending on geography and the labor market; those that we hired at $9, if they showed promise and aptitude, we quickly raised them to $10. My partners and I also made the business decision to provide full health benefits (equivalent to the insurance exchanges platinum plan) to full-time employees who kick in 20% of the cost, leave, retirement and other benefits to all other employees - all modeled on the Federal government where I used to work. Why would we choose such an expensive thing? In order to attract - and keep - more qualified administrative. There is also another important, even overriding reason for offering these wages and benefits to our employees; each of the three of us couldn't live with ourselves paying such a paltry wage as the current minimum wage to human beings trying to live honest lives; to us, it is an insult and speaks badly of any employer who pays it.
Our company is a rather profitable small fish in a very big pond but has hung on for almost 14 years now, giving at least a cost of living raise each year to employees who deserve it and not laying anybody off during the Great Recession (although a few creditors and the owners suffered the consequences for awhile, well the owners still are, we haven't had a raise in eight years). The reason we survived when many of our competitors are multimillion dollar companies is the dedication of our employees and service they provide to our clients; which means when we get a client, we keep them.
The point I am trying to make with this story is I don't have much sympathy for the "woe is me" companies, or their supporters, that say this minimum wage is so onerous as to drive them out of business or raise their prices so as to make them competitive; that is simply a bunch of malarky. On the one hand, our prices our right in the middle of the range or a schosh to the higher side in our industry, but when our clients see the service they get for their dollar, they tell us they are getting a bargain. And on the other, the raise in minimum wage effects everybody (except those who already pay their employees a decent wage) so all of the companies who pay non-livable wages are affected the same and there is no competitive disadvantage between them.
So Why Raise the Minimum Wage At All?
WHAT IS DRIVING OBAMA'S AND THE DEMOCRAT'S DESIRE to raise the minimum wage by such a large amount? The table and chart below should tell the story.
2013 POVERTY THRESHHOLDS
ANNUAL COMPENSATION COMPARISON BY EMPLOYMENT CLASSIFICATION (2013$)
PART-TIME WORKER ESTIMATE
Office & Admin
Sales & Related
Food Prep & Serv
Transport & Material Move
Retail Sales Workers
THE PROBLEM SHOULD BE OBVIOUS, EVEN TO A CASUAL OBSERVER. The first two columns are the mean annual compensation for Chief Executives and General/Operations Managers; your top dogs at any company or corporation. The remaining classifications are samples from other types of functions for which people get paid and the red line is GDP for the same period.
Notice the bifurcation of trajectories of the first two columns compared to no trajectory whatsoever for all the other functions over the 16 year period I could obtain consistent data. Why is that? Why is it the only salaries increasing with the growth in GDP are those top 5% or so who control the wealth in the first place? Everybody else is simply keeping pace with inflation, if that. What you see in Chart 4 is what President Obama is talking about when he is trying to describe in words "Income Inequality".
If the game weren't rigged against the average American, then their salary increases would have kept pace with GDP growth as well. But it is rigged, it is rigged by those who control wages, the only ones who saw actual growth in their personal earning over the last 16 years; these are the people the Conservatives say are helping the average Americans and we should simply leave them alone to do what they do best; create jobs. Well, Chart 4 shows what they actually do best, pay themselves well and make sure nobody else shares in the American Dream.
When you take Table 1 and 2, along with Chart 4 together, it should become apparent that there is a huge number of working Americans and American families existing near the rather draconian poverty thresholds. The six occupational groups in Table 2 account for roughly 56% of the American workforce. Of those, 25% or 18 million people earn close to or below the poverty line. $10.10 is roughly $21,000/yr which is higher that all of those in the 10th percentile group and most of those in the 25th percentile group; and this is the wage the Democrats are trying to bring people up to; it isn't where they are starting from, which is at the bottom of the pile already.
If you look at Table 1, you will find $21,000 falls between a family of 3 and 4 in terms of poverty thresholds. It is very easy to imagine families comprised of a single mom or dad and two kids or parents, each of whom can only find part-time jobs, with two kids. Again, this is what the minimum wage increase is trying raise people to; many from a place far below. What I find ironic, in another hub I am asking readers to estimate what the poverty threshold should be for a family of three living in Omaha, NE; their answer, between $33K and $39K. (the link is in Related Links below)
Chart 4, as has been mentioned earlier, clearly depicts an economic system where only managers and executives are rewarded while everybody else in the workforce is not and thereby kept in their economic condition regardless of the efforts to improve it. This is the story Obama is trying to tell.
Before summing up, I want to present one more piece of this puzzle. It goes back to a statement made In May 2012, by Presidential candidate Mitt Romney, who said:
"All right, there are 47% who are with him [Obama], who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it. That that's an entitlement ... These are people who pay no income tax ... My job is not to worry about those people. "
And that has been the Conservatives mantra from that day forward. Of course, Mr. Romney and those who agree with him don't care that 50% of that 47% (a real enough number IF you make the huge assumption Romney was talking only about Federal income taxes) are 1) the elderly on fixed incomes, 2) the rich who don't earn taxable income or are able to use tax loopholes not available to regular Americans to bring their taxable income down to zero, 3) the disabled veterans drawing disability as well as all other disabled Americans, and 4) the working Americans who don't earn enough to exceed the standard deduction plus exemptions ($10,000 for individuals and $20,000 if filing jointly) when they file their taxes; which may include many in the 10% group in Table 2.
Of the remaining 23.5%, most of those are families filing jointly who make more than $20,000 but have children and qualify for the child and education tax credits or may be energy or retirement conscious and qualify for those tax credits as well that bring their taxable income down to zero; this would be the people in the 25th Percentile in Table 2 and probably more than that. Is it possible that Conservatives object to these credits because the recipients aren't well off? If not, then why are they angry these people do not pay any income taxes like some of their rich brethren don't?
So what you are left with are a few percent of people who are unfortunate enough not to have a job, the majority of whom want one but can't get one. Once again, Conservatives say these people are whiners and just don't try hard enough but unfortunately jobs simply do not grow on trees simply for the picking like they must assume they do. The fact is that even today, four years after job growth re-emerged, there is only 1 job available for every 4 people looking for one. Now, I understand math is tricky for a lot of people, but even a fifth grader can understand not everyone who wants one can have a job when only 25% of those looking can possibly be successful. So, when the dust settles, Mitt Romney and group are really talking about 1% of Americans, not 47%.
And it is this latter group of working Americans which President Obama and the Democrats are trying to address with the increase in minimum wage. They want to start showing growth in the other four columns in Chart 1. Unfortunately for those who support the well-off, since those in the first two columns hoarded all the extra money (the proceeds from economic growth) for themselves, they are going to have to give some of it up to the rest of the working Americans so that the other 95% can participate in and be rewarded for their sweat, toil, and tears.
Summing It Up
THE PURPOSE OF THE PUSH TO RAISE THE MINIMUM WAGE TO $10.10/hr is to lift Americans out of poverty. The CBO says it will do that. But, it mustn't stifle growth in the process and the CBO says it won't do that. A fallout from the raise in minimum wage will be to, ever so slightly, begin to let the rest of America participate in economic growth that only the top few percent of Americans benefit from now. It might even reduce the Conservative's 47% some as it will lift a few families to a level where the credits won't entirely offset the taxes due; although the rich who don't pay taxes will continue to not pay taxes.
The arguments about the projected number of job losses and people leaving poverty is totally bogus; both the Republicans and Democrats are barking up the wrong tree flouting the mid-point numbers offered, with heave caveats, by the CBO. What the real number is, is anybody's guess. It is possible there will be no jobs lost; that is not likely, but it is possible. What isn't possible is that no one will be pulled out of poverty. The mathematics of it all guarantee some will be, but what the true number will be is again unknown.
The fact that income inequality is real and that only the well off participate in the American Dream today is plain to see to anybody who has eyes and a brain to reason with. There can be no other explanation for why Chart 4 looks the way it does. It is the challenge of all right-thinking Americans to get Chart 4 to have all columns following the same pattern at their respective wage levels and not just the highest wage levels.
LOOKING BACK AT CHART 4
SHOULD ALL OF THE COLUMNS ON CHART 4 FOLLOW ROUGHLY THE SAME GDP GROWTH PATTERN?
© 2014 Scott Belford