What the Congressional Budget Office Doesn’t Get

What the Congressional Budget Office Doesn’t Get

What the Congressional Budget Office Doesn’t Get

About a $15-an-hour minimum wage, unemployment, and why a low-wage economy is bad for everyone.

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The Congressional Budget Office’s assessment of President Biden’s proposed increase in the minimum wage to $15 an hour is both predictable and disappointing. While acknowledging that 27 million people would get a raise (which would help alleviate a poverty rate that now stands at 11.8 percent), the CBO makes the questionable claim that there would be 1.4 million jobs lost. Hence it scores the proposal negatively, as a net cost to the government of $54 billion over 10 years.

It is doubtful whether any economic forecast has genuine validity over a 10-year time frame (even as the CBO forecast conveniently exaggerates the cost of the proposal). A more problematic aspect is that the CBO’s assessment parrots outdated claims about the relationship between wages and unemployment that have been undermined by a growing body of empirical evidence.

As early as 2004, a study by the Organization for Economic Cooperation and Development suggested that the evidence supporting the traditional view that high real wages—which indicate a worker’s capacity to purchase goods and services—cause unemployment “is somewhat fragile.” More recent studies have indicated that a significant rise in the minimum wage would result in a drop in overall poverty rates. Bloomberg columnist Noah Smith cites “a 2019 paper by Arindrajit Dube [that] finds that doubling the minimum wage would result in somewhere between a 2.2 percent and a 4.5 percent drop in poverty.” There are other analyses in a similar vein, all of which point to the fact that Biden’s proposed minimum wage hike is, in fact, a highly effective anti-poverty policy.

The vitality of our economy is dependent on the spending power of the population—that is, unless we want to resemble China in the 1990s, with its export-oriented production based on cheap labor and suppressed local consumption. But to get the economy back on track, spending power must be in the hands of those who actually spend in the real economy.

However, the minimum wage story is not just a story about income inequality. It’s also about an elite that has hijacked the economic system and made it work less productively than before—while redistributing more of the wealth that is produced to themselves. As Jim Reid, a research strategist at Deutsche Bank, points out, “Since 1947, US minimum wages have multiplied 18 times their original amount whereas corporate profits have climbed 202 times.” In this context, Biden’s proposed increase represents a small and welcome shift of the pendulum in labor’s direction for the first time in decades.

The growing gap between real wages and productivity has violated the traditional relationship between real wages and consumption. If the productivity of each worker is rising strongly, yet that worker’s capacity to purchase is lagging badly behind, how can an economic recovery that relies on growth in spending sustain itself?

Presenting low wages as a condition for high employment treats employment as a substitute for the welfare state. But keeping wages low not only generates misery for the employees, it also maintains zombie businesses that should not exist. No worker should be paid below what is considered the lowest tolerable standard of living just because some low-wage, low-productivity operator wants to continue to adhere to exploitative labor practices.

Rather than sustaining feudal labor practices, firms should have to raise their productivity levels sufficiently to have the capacity to pay a living wage—or disappear. That would generate an economy that pushes productivity growth up while also increasing living standards. The few who cannot thrive in such an economic environment should be able to rely on robust public services and a strong social safety net, not on a dysfunctional “free” market.

Increasing the minimum wage is hardly a radical idea. “An enforced increase of wages,” wrote a 26-year-old Karl Marx in 1844, “would be nothing but better payment for the slave, and would not win for the workers their human status and dignity.” Perhaps this will reassure conservatives that setting the federal minimum wage at $15 is not the beginning of a socialist revolution. But it might be the beginning of a social reform that can help us build back better by ending our reliance on the market—in this case, the labor market—to solve all our problems.

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