CBO report says: There would be a net INCREASE in DEMAND even if there would be job losses...

[Bill USA]

Last edited Thu Mar 6, 2014, 04:50 PM - Edit history (9)

...of course, if they did not properly calculate the change in demand from a 4.8% increase in prices (per yr, over two years) (see below) and a[font size="3"] 38% increase in buying power[/font] for some percentage of the 59% of the country's employed (1.6 million, of 75.3 million hourly employees, are paid the minimum wage, but CBO correctly indicated that increasing the wages of those at the minimum wage would lead to increases in others just above minimum wage to maintain the relative pay scale), the number of jobs lost could be zero or it may be a number of jobs GAINED depending on how buyers reacted to a given price increase (not specified by CBO) and given the 38% increase in buying power for some proportion of all hourly wage workers).

The CBO said in their report on Increasing the minimum wage that it would lead to job losses. but on Page 27 of their report they say there would be a net increase in demand - without mentioning how much increase in demand they calculated. Without knowing what they calculated for the increased demand nobody can evaluate whether the amount the calculated was appropriate.


http://cbo.gov/sites/default/files/cbofiles/attachments/44995-MinimumWage.pdf#page=31
(emphasis my own)

On balance, according to CBO’s analysis, raising the minimum wage would increase demand for goods and services because, taken together, the second, third, and fourth direct effects would shift income from business owners and consumers (as a whole) to low-wage workers. Low-wage workers generally spend a larger share of each dollar they receive than the average business owner or consumer does; thus, when a dollar from business owners or consumers is shifted to low-wage workers, overall spending increases. The increase in demand from that shifting of income would be larger than the decrease in demand from the reduced consumption of people who became jobless, CBO estimates.

and ....
http://cbo.gov/sites/default/files/cbofiles/attachments/44995-MinimumWage.pdf
(emphasis my own)

An increase in the minimum wage also affects the employment of low-wage workers in the short term through changes in the economywide demand for goods and services. A higher minimum wage shifts income from higher-wage consumers and business owners to low-wage workers. Because those low-wage workers tend to spend a larger fraction of their earnings, some firms see increased demand for their goods and services, boosting the employment of low-wage workers and higher-wage workers alike. That effect is larger when the economy is weaker, and it is larger in regions of the country where the economy is weaker.

So, there will be reduction in number of workers even though there is a net increase in demand. Hm-m-m-m.

The CBO indicated that the increased cost of increasing the minimum wage would be in part passed on to consumers but they didn't say how much of a price increase they thought would occur. How much the price increased is important as it directly affects the degree to which consumer spending is affected. If CBO calculated too much of a price increase that will reduce the net increase in total consumer demand the CBO said would occur. Of course, a bigger net increase in total demand would reduce the jobs lost figure or could ELIMINATE IT.

So how much would prices increase due to an increase in the Minimum wage? The CBO didn't show what they computed this would be.... even though that is a critical number in figuring the impact on demand.

[div name="demnd" id="demnd" class="excerpt"]
Calculating a change in prices given a 38% increase in minimum wage
Here's one approach....

Most minimum wage workers are in the leisure and hospitality sector.

http://www.bls.gov/cps/minwage2012.htm#1a
(emphasis my own)

The industry with the highest proportion of workers with hourly wages at or below the federal minimum wage was leisure and hospitality (about 19 percent). About half of all workers paid at or below the federal minimum wage were employed in this industry, the vast majority in restaurants and other food services. For many of these workers, tips and commissions supplement the hourly wages received.

McDonald's is a good company to use as a model for employers in the leisure and hospitality sector. To get an idea how much prices would be increased by a given change in wages cost, I checked out McDonald's Profit and Loss sheet and it shows that wages expenses represent about 25% of the total revenues (just looking at company operated restaurants). An increase of the Minimum wage from $7.20 to $10.00 is 38% increase in wages - (assuming most workers at McDonalds are making the minimum wage). So how much would prices have to be increased to cover a 38% increase in wages at McDonalds - about 10% (.25 x .38). If that price increase was spread over two years the annual increase necessary to cover the wage increase would be 4.8% - and that is without any absorption of the cost increase by the company - that is, maintaining the same profit rate!

Now, how much would sales fall off due to an increase of 4.8% - or about 19 cents on a $4.00 order?

And for the 10% increase in the prices you've given minimum wage workers a 38% increase in their buying power (number of minimum wage workers: 3.6 million or 4.7% of hourly workers) !

http://www.bls.gov/cps/minwage2012.htm#1a

In 2012, 75.3 million workers in the United States age 16 and over were paid at hourly rates, representing 59.0 percent of all wage and salary workers

[1StrongBlackMan]

1. I('m on my second read through of the CBO report ...

and have not settled on my opinion; however, the point you raise ... increase in demand with a decrease in employment ... immediately jumped out at me. That, plus, I found it curious that they would assign increase in employer costs AND increase in prices as a reason for the employment loss, when increases in prices reflect the increase in employer costs.

Also, unless I missed it, they did not calculate the effect of the increase in pricing on demand ... Yes, it is intuitive that increase in pricing will depress demand; but that is not necessarily true ... a lot demands on the amount of the increase and on what items. For example, take fast food sales ... an increase in lower end wages, has been demonstrated to produce an increase in fast food sales; an increase in the minimum wage to $15.00/hr., would translate into a 5 cent increase in the cost of a hamburger; that 5 cent increase is unlikely to have much effect on hamburger sells.

And, the effect would be even less for "walmart" (lower end clothing/household item) sells, as the percentage of price increase (per item) necessary to cover the increased employer cost is far lower ... e.g., 5 cent increase on a $2.00 hamburger is greater than a 5 cent increase on a $10.00 shirt ... IOWs, a consumer might pass on a 5 cent increase for the burger; but would be unlikely to pass on the shirt because of the slight increase.

[RAM49]

2. $7,000,000,000

It seems to me, like it might be best if we take back the 7 billion we
gave away in... CEO- PERFORMANCE-BASED-BONUS COMPENSATION!

$10hr x 40hrs = $400wk x 50wks = $ 20,000 year

$ 7,000,000,000 divided by $ 20,000 = 350,000 jobs

[Bill USA]

3. Think Progess also points out the lack of detail on how much prices would go up, and how much demand

would be effected:

The Troubling Fine Print In The Claim That Raising The Minimum Wage Will Cost Jobs

The Congressional Budget Office’s (CBO) new report finds that a minimum wage increase to $10.10 would raise wages for 16.5 million Americans, adding up to a total of $19 billion in pay increases, and lift 900,000 out of poverty. These findings are well explained in the report and its appendices.

But other effects on employment, employee turnover, public spending, prices, and profitability are less well explained, opening the CBO report up to important questions about its conclusions, particularly the claim that increasing the minimum wage to $10.10 an hour would cost 500,000 jobs.

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[font size="3"]
Increased prices

The CBO report states that higher minimum wages will increase consumer prices. However, the assumed price effects are not spelled out anywhere in the report, nor is there any reasoned explanation of their effects on consumer demand. [/font]
(more)

Frankly, you can't award any credibility to a report which leaves out a statement of rationale for any essential factors used (were they used? we don't know looking at this report) in coming up with their final conclusions. It's no better than some guy sitting on a stool in bar opining on economics between quaffs of beer.

This report does not do the CBO any good at all.