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The Flawed Congressional Budget Office Report on the Effects of Minimum Wage Increases

Mike Critelli -

The Congressional Budget Office (“the CBO”) published a report on February 18, 2014, with its estimates of the effect of a federal minimum wage increase from $7.25 to $10.10. The headlines from the Report would appear to support the finding that the increase would cost 500,000 jobs, but would lift 9 million families out of poverty and produce more real income from the country as a whole, because those benefiting from the minimum wage would spend more and create additional jobs and income. Not surprisingly, one candidate sent me an announcement with a solicitation and with her enthusiastic support for higher minimum wages because of this report.

Unfortunately, this is a flawed report, which grossly underestimates the horrible job-killing effects of the radically higher minimum wage.

The CBO states on its web site that it takes into account research from a wide range of experts and also attempts to predict the responsive behavior of businesses, families and individuals to the federal action. It also states that it cannot take into account the effect of future government legislation and regulations. In other words, if ObamaCare, combined with a higher minimum wage, causes a reduction in employment, the ObamaCare effect, which is highly pronounced at the 50-job level for employers, is simply not take into account.

Having read the Report, I was most curious as to how it forecasted the future effect on employment. I noticed the following:

  • Not surprisingly the estimate of 500,000 future jobs lost was not a precise number, but an attempt to select a number within a much broader range. The CBO estimates were as high as 1 million jobs, and there were a few outlier sources that predicted essentially no effects, so it attempted to take a reasonable middle ground.
  • More importantly and decisively, the CBO’s sources about future effects were drawn from long-term studies that looked at past minimum wage increase decisions going back to the 1990’s, some starting as far back as 1990. This is the fundamental flaw in the study. It fails to take into account that the combination of automation, self-service, process re-engineering, and off-shoring have not only increased since 2008, but their rate of increase has accelerated.
  • The CBO considers the minimum wage increase to be a catalyst for higher wages and salaries well above minimum wage levels. I believe that the more we see compensation and benefits increases across the board, the more rapidly we will see the economic case for more labor-replacing technology and process change investments get more compelling. RAPIDLY RAISING WAGES AND SALARIES WITHOUT COMPARABLE INCREASES IN PRODUCTIVITY IS A RECIPE FOR HIGHER STRUCTURAL UNEMPLOYMENT.

What does this increase in the rate of change mean?

The rate of technological change and the ability to eliminate human beings from the work process is not only increasing and accelerating, but it is accelerating exponentially, according to Federico Pistano in his 2012 book Why Robots Will Steal Your Job: But That’s Ok: How to Survive the Economic Collapse and Be Happy.

Innovation today is quite different from the innovation that occurred during the period the experts upon which the CBO relied were studying. Computing technology enabled the replacement of relatively low-skilled jobs that required relatively low human judgment. The technology that is being deployed today is replacing much higher skilled jobs that are substituting robotics and artificial intelligence for less reliable and productive human judgment.

The experts who compiled studies of past employer responses to higher minimum wages were not looking at a world in which online and automated voice response systems replaced call center workers. They also were not looking at a world in which offshore workers were being deployed to replace U.S. workers, a process that accelerated after 2000, oddly enough because of a shortage of U.S. workers during the run-up to the Y2K deadline in 2000. At Pitney Bowes, we had 15 U.S. call centers when I became the CEO in 1996, and four when I retired in 2008.

Technology affected Pitney Bowes and our customers in other ways as well. Faxing and copying were handled in a centralized environment for even medium-volume jobs until the 2000’s, and the people who carried the original documents to the copy center and carried the copies to the person ordering the job were minimum wage workers. Many more of those jobs were done at satellite multi-functional devices after the year 2000, and, today, are often not done at all, as more documents move electronically.

Almost all retail jobs were minimum wage positions and there were millions of them, but the rate of technological and process change has increased the penetration of self-service checkout in the last five years. With a higher minimum wage, that movement to self-service will accelerate. During the period the CBO experts studied, the concept of a self-driving car was science fiction. Today, it is a reality in California and Nevada.

In essence, the CBO and the experts on which it relies look backward and project the same trends looking forward. While the CBO believes it is taking into account the responsive behavior of businesses, families and individuals, it is clearly not taking into account the innovative technologies and process re-engineering capabilities those businesses and individuals will be able to incorporate into work processes.

It is also not taking into account another major societal trend, the substitution of e-commerce for face-to-face retail. Up until recently, many minimum wage individuals worked at local retail stores or national chains, such as Borders Books or independent book sellers, HMV or other music retailers, Blockbuster video or local DVD rental stores, Circuit City, Best Buy, Radio Shack, or local computer stores, or Walgreens or the local independent pharmacy. In every one of these cases, an e-commerce alternative has emerged:

  • We order books or e-books from Amazon.com;
  • We stream videos from Netflix, or, at worst, order DVDs by mail;
  • We order music downloads from I-Tunes on to our I-Pod, instead of buying a CD from the local store;
  • We order products online from Apple and receive online or telephone support from Apple; or
  • We order pharmaceuticals by mail from suppliers like CVS and Express Scripts.

When logistics and supply chain are centralized, it is far easier to eliminate minimum wage jobs than it is in the context of a local retail outlet. It is also easier to eliminate jobs when more of the movement of entertainment content is electronic, rather than the shipment of a DVD or CD.

None of these technological or process changes, all of which are obvious to anyone living in the real world, were taken into account by the CBO, not because they should not have been, but because the CBO wants certainty and supportability from its research sources, as opposed to accuracy.

The CBO is a government agency. Like all government agencies, its employees are most concerned about being beyond criticism. If the CBO ventures into the predictive realm and attempts to project future trends that have no “bullet-proof” data from the past, its employees would be roundly criticized and have their careers at risk.

The likelihood that the media will do its homework and go through the process of tracing the CBO’s findings back to their original sources and spotting the flaws in those sources is relatively low. It is far easier to stay anchored in a past reality that is very likely to be unreal in the future than to venture into a messy future, however logical and supportable it is.