The CBO is Stuck in the Past on the Minimum Wage

The Congressional Budget Office just released another analysis of the projected effects of raising the minimum wage to $15/hr, and while they acknowledge that it would provide income gains for millions, lifting many out of poverty, they are unfortunately still stuck in the past on the effect on jobs, claiming it would cost 1.4 million jobs. 

This claim, once traditional, is based on the outdated belief that these labor markets are highly competitive markets, where increasing pay automatically leads to higher prices and lower employment. This view takes as an assumption that firms have little monopoly or monopsony power, as this section of the CBO report makes clear:

"In some limited circumstances, increasing the minimum wage could boost employment if employers had what is known as monopsony power—that is, bargaining power that allows them to set wages below the rates that would prevail in a more competitive market." {emphasis added} 

But as I have shown in two papers, low-wage labor markets in particular, and many of our other markets as well, have become quite concentrated, giving firms significant market power (monopoly power on prices, monopsony power on wages).  As the Economic Policy Institute describes the CBO analysis, “… CBO nevertheless substantially overstates the costs…. it failed to appropriately weight the highest-quality studies in the vast academic literature on this issue.”  In fact, there is a growing consensus amongst economists that “… the employment effects of moderately sized minimum wage increases are quite close to zero”, sentiments shared by more and more researchers. 

The reason for this potentially surprising result is that concentrated markets respond differently to regulation than the highly competitive ones assumed by free market dogma.  Whereas a competitive labor market would respond to a higher minimum wage with a reduction in employment, that’s because competition has already ensured the wage is at competitive-market levels.  When firms in a concentrated market suppress wages below that level, they must accept reduced employment as a consequence; raising the minimum wage (up to the competitive level) simply corrects the market failure, bringing wages and employment back to their competitive-market levels.

As our politicians debate whether to raise the minimum to $15 / hour, it is critical to remember that, in concentrated markets such as our low-wage labor markets, this is a pro-competition intervention that returns wages to competitive market levels, and does so not by cutting jobs, but by returning supranormal profits to the workers who have earned them.

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