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News from EPI Overall costs and benefits, not job loss, should be the metric by which we evaluate minimum wage increases

In a new paper, EPI economic analyst David Cooper, distinguished fellow Lawrence Mishel, and economist Ben Zipperer argue that increases in the minimum wage should be evaluated with a more standard framework that assesses the costs and benefits for low-wage workers—rather than relying on potential job loss as the sole determinant of whether a minimum wage increase is a sensible policy.

“The minimum wage is the only policy where the bar is so high that a prediction of even one lost job is considered unacceptable,” said Zipperer. “This singular focus ignores the benefits of boosting wages for the vast majority of low-wage workers that happens when you raise the minimum wage.”

The authors argue that critics who cite potential job loss to reject bolder minimum wage increases are focusing only on the potential costs of raising the minimum wage, and ignoring the benefits of boosting low-wage workers’ total earnings. Furthermore, focusing on job loss ignores the high degree of churn in the low-wage labor market, giving the misleading impression that a given pool of workers would lose their jobs and have no earnings over an entire year. The more likely scenario is that any employment reductions would lead to some lost job hours over the course of a year, which would be spread among the affected workers who work a little less each year but earn more per year thanks to the new higher hourly rate.

Low-wage workers are more likely to cycle into and out of employment often during the year—the monthly rate of churn into and out of employment for low-wage workers is roughly twice as high as it is for workers in the middle of the wage distribution. Because of this high turnover, any possible reduction in total hours worked by the low-wage workforce is likely to be shared by many people, in the form of fewer weeks worked throughout the year and longer spells in between jobs.

“As cities and states move to enact bolder minimum wage increases, advocates are going to have to shift the debate away from whether a given increase will cost jobs, to be about what will be best for low-wage workers overall,” said Mishel.

As an example, the authors point to coverage of the Congressional Budget Office’s (CBO) analysis of a 2013 proposal to raise the federal minimum wage to $10.10 by 2016. While the report’s prediction of 500,000 fewer jobs is far above the range suggested by some of the best studies on the likely employment impacts of that modest increase in the minimum wage, it regardless still implies that 97.1 percent of workers directly affected by the increase would have remained employed and earned more per year—and the overall pool of wages earned by low-wage workers would have expanded substantially. This more complete description of the findings shows that the benefits of the policy would have far outweighed the estimated costs.

The authors argue that the overall pool of wages earned by workers is a better metric by which to judge minimum wage increases. CBO estimated that raising the minimum wage from $7.25 to $10.10 would have increased the hourly wages of 17 million workers by 14.5 percent, prompting employers to reduce employment by 500,000, or 2.9 percent of those directly affected workers. If these employment declines were spread out over the entire group—if all 17 million lost some hours but no workers were out of work for an entire year—all affected workers would be better off, working a little less (2.9 percent fewer hours) but enjoying an annual income increase of 11.6 percent.