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February 18, 2014

Budget office: Wage increase would help many but decrease jobs

Report contains ammunition for both sides in election-year proposal by Democrats

WASHINGTON — Boosting the federal minimum wage as President Barack Obama and congressional Democrats are proposing would increase earnings for more than 16.5 million people by 2016 but also cut employment by roughly 500,000 jobs, Congress’ nonpartisan budget analyst said Tuesday.

In a report containing ammunition for both supporters and opponents of the Democratic election-year proposal, the Congressional Budget Office said gradually raising the minimum from $7.25 hourly to $10.10 would lift 900,000 people above the federal poverty level by 2016. That is out of 45 million who would otherwise live in poverty without an increase.

But the analysis also noted a downside: About 0.3 percent fewer jobs, especially for low-income workers; higher costs for business owners and higher prices for consumers.

The study was unveiled as the Senate prepares for a March debate on a plan by Sen. Tom Harkin, D-Iowa, ramping up the minimum in three steps to $10.10 by 2016. The proposal is backed by Obama and is a keystone of Democrats’ campaign-season plans to highlight their effort to make incomes more equitable, but it faces strong Republican opposition and long odds of approval by Congress.

The analysis, which examined increases very similar to Harkin’s, immediately added fuel to the partisan dispute over the proposal. It put authoritative weight behind longtime GOP claims that increasing the minimum wage would cost jobs by forcing companies to spend more on wages, putting Democrats on the defensive.

“This report confirms what we’ve long known: While helping some, mandating higher wages has real costs, including fewer people working,” said Brendan Buck, spokesman for House Speaker John Boehner, R-Ohio. “With unemployment Americans’ top concern, our focus should be creating — not destroying — jobs for those who need them most.”

The budget office said its estimate of employment losses was approximate. It said the actual impact would likely range from a very slight employment reduction to a loss of 1 million workers.

“If and when Democrats try to push this irresponsible proposal, they should be prepared to explain why up to a million Americans should be kept from having a job — beyond the work already lost due to ‘Obamacare,’” said Senate Minority Leader Mitch McConnell, R-Ky., using a favorite nickname of the GOP’s favorite election-year target — Obama’s 2010 health care overhaul.

Democrats cited other studies that they said concluded employment would not be reduced. They said job-reduction claims are overblown and outweighed by the benefits to workers and the overall economy as low-paid employees use their higher incomes to spend more money.

The CBO job-loss figures “do not reflect the overall consensus view of economists which is that raising the minimum wage has little or no negative effect on employment,” Jason Furman, chairman of the White House’s Council of Economic Advisers, said in a blog post with council member Betsey Stevenson. Instead, they emphasized the millions who would gain higher wages and the 900,000 boosted above poverty.

“No matter how the critics spin this report, the CBO made it absolutely clear: Raising the minimum wage would lift almost one million Americans out of poverty, increase the pay of low-income workers by $31 billion, and help build an economy that works for everyone,” said House Minority Leader Nancy Pelosi, D-Calif.

A minimum wage boost can cost jobs because employers can compensate for their higher wage costs by raising prices, prompting consumers to purchase fewer goods and services and, in turn, encouraging companies to hire fewer workers, the report said. A minimum wage increase also encourages some businesses to trim the number of low-paid workers.

But the study said the effect can be mixed.

It noted that some firms would react by getting higher productivity from their workers, and some would see savings because increased wages could reduce turnover. Other companies could benefit as increased spending by low-wage workers boosts demand for their products.

After 2016, Harkin’s measure would require the minimum wage to be increased annually to reflect rising inflation.

The study also examined the impact of boosting the minimum wage to just $9 hourly by 2016 and leaving it at that level afterward. That lesser increase would have smaller effects: About 100,000 fewer jobs, higher wages for 7.6 million workers and 300,000 people lifted out of poverty.

The report said the increase to $10.10 would add $31 billion to the earnings of low-wage workers. But it noted that only 19 percent of that increase would go to families earning less than the poverty threshold, while 29 percent would go to families earning more than triple the poverty level. That is because many low-wage earners are not in low-wage families.

But in addition, income would decrease by $17 billion for families earning at least six times the poverty level because that group would be affected most by lost business income and price increases.

The report said that besides boosting wages for people earning less than $10.10 hourly, some people making more than that amount would also see higher earnings as bosses adjust their pay scales upward.

Some people’s incomes would grow as their earnings increase, causing them to pay more taxes. But for others, income would fall — reducing their tax burden — and still others would begin collecting unemployment insurance.

As a result, the budget office said federal budget deficits would probably decrease slightly for a few years but then increase slightly after that.

The budget office estimates that the 2016 poverty level would be $24,100 for a family of four and less for smaller families.

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