Thomas Lucente: CBO agrees minimum wage kills jobs

By Thomas J. Lucente

February 23, 2014

Once again, the Congressional Budget Office has come out with a report telling us what we already should know. That is, raising the minimum wage kills jobs. A lot of jobs.

Still, that hasn't stopped President Barack Obama from proposing raising the federal minimum wage from $7.25 to $10.10 an hour. After all, economic realities has never stopped Obama from doing stupid things.

This is Economics 101.

Say, for example, you purchase your apples from a local merchant for 50 cents each. You buy seven of them a week because, as they say, an apple a day keeps the doctor away and with Obamacare you can longer afford health care.

Then, the merchant starts charging you $1 an apple. Now, instead of paying $182.50 a year, you suddenly have to pay $365 a year. Now that $25 copay for the doctor is not looking so bad. Now you are faced with the question of whether you double your apple budget or simply purchase fewer apples. The higher the price goes, the more likely you are to purchase fewer apples.

There is no difference with labor.

If instead of buying apples, let's say you own a business selling widgets with 100 employees making $7.25 per hour, the current federal minimum wage. That means you are paying $1.51 million in salary a year. For simplicity sake, that does not include benefits or your share of Social Security or any of the other myriad expenses related to employment.

Now, if the minimum wage is increased to $10.10 per hour, your cost of wages increases to $2.1 million. Overnight, you suddenly have to start spending $592,800 more. Where is that money going to come from?

You can raise prices, but if you do that, people start buying fewer widgets (see the apple example above) so you are not bringing in any more money. So, you will have to cut employees. To keep your budget in check, that increase in minimum wage means you have to layoff 28 employees. Or maybe you layoff even more and invest the savings in automation technology.

Simply put, raising the price of low-productivity workers will reduce demand for them. Basic economics.

This is what the CBO confirmed. By its analysis, raising the federal minimum wage will result in the loss of as many as 1 million jobs. An increase to $9 an hour could mean the loss of up to 200,000 jobs. Do we really need job-killing legislation with so many unemployed? (The actual unemployment rate would be above 10 percent if the workforce participation rate were as high as it was when Obama took office.)

The problem is further muddied by the fact that a large percentage of minimum wage workers are not in poverty.

Less than 3 percent of the workforce earns the minimum. More than half of minimum-wage earners are students or other part-time workers from households with average incomes of $53,000.

Or, as the CBO reported: “The increased earnings for low-wage workers resulting from the [$10.10] … minimum wage would total $31 billion. … However, those earnings would not go only to low-income families, because many low-wage workers are not members of low-income families. Just 19 percent of the $31 billion would accrue to families with earnings below the poverty threshold, whereas 29 percent would accrue to families earning more than three times the poverty threshold.”

In other words, we have another Obama policy that benefits the rich rather than the poor. Since Obama has taken office 95 percent of real income growth has accrued to the top 1 percent.

I agree the minimum wage needs changed, but not with a ridiculous increase to $10.10 an hour. A more reasonable approach would be to change the minimum wage to zero. After all, if an employer and an employee reach an agreement on a wage, then what business does the federal government have in negating that mutually acceptable contract? Before the New Deal destroyed America, that used be known as liberty of contract.

But, as all should know by now, liberty is not really in the liberal lexicon.