The recent Congressional Budget Office Report confirms raising the minimum wage in line with inflation to $8.25 is the best course. It would likely not create much additional unemployment, still put billions of dollars in the pockets of the working poor, and does less damage to the economy.
The CBO analysis finds raising the minimum wage to $10.10 an hour, as the president proposes, would likely kill 500,000 jobs. It found even a more moderate increase to $9.00 would increase the jobless figure to 100,000.
The minimum wage was last adjusted to $7.25 in 2009, and adjusting it for inflation to $8.25 would not further raise the cost of labor relative to labor-saving machinery. Hence, it comes as no surprise that the CBO findings infer that such an increase would not appreciably increase unemployment and would still provide benefits of additional income to the working poor.
Any floor for wages–or increase in that floor–reduces overall productivity and economic welfare by distorting markets. In particular, the minimum wage encourages the overuse of labor saving machinery in low skilled activities at the expense of other investments in more promising pursuits–and destroys jobs.
Still as most Americans seem supportive of additional measures to support the earning power of low-skilled workers, raising the minimum wage to $8.25 is the best compromise.
Earlier this month, I argued that raising the minimum wage to $10.10 as President Obama proposes would be terribly harmful, and a more modest increase to $8.25 is the best course.
The CBO study confirms my analysis.
Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and a widely published columnist. He tweets @pmorici1.