#WorkingFamilies Summit

Cover of "Women, Working Families, and Unions"In advance of next Monday’s “White House Summit on Working Families,” CEPR released a report this morning that looks at the role that unions can play in improving work-life balance, particularly for women.

My colleagues, Janelle Jones and Nicole Woo, and I start from the observation that the typical woman spends far more time in paid work now than she did three or four decades ago, but women still do the large majority of unpaid child-care, elder-care, and routine housework. We then document that women in unions not only earn more and are more likely to have health and retirement benefits, but they are also much more likely to have a host of family-friendly benefits including paid sick days, paid vacations, and paid family and medical leave.

Given that one-in-nine women workers in the United States is in a union and women now make up just under half of all union workers, unions can play an important role in updating labor-market institutions to fit 21st century realities.

Why Don’t More People Go To College?

At the Upshot today, David Leonhardt asks if college is “worth it” and answers with a resounding “clearly,” citing data he obtained from the Economic Policy Institute. Leonhardt’s answer, however, raises a bigger question, which he leaves unexamined: if college is such a good investment, why aren’t more people making it?

The data he presents show a big increase between 1979 and 2013 in the earnings of college graduates relative to high school graduates (the top line in the chart below). The gap, which has always been large, grew steadily for more than 20 years from the end of the 1970s into the early 2000s before slowing down in the 2000s. Leonhardt makes much of the uptick in the last couple of years, which puts the returns to college at an all-time high, but the growth in the college premium has clearly decelerated somewhat since about 2002, even with the finishing flourish in the chart.

Financial return to a college degree, 1973-2013
Source: New York Times.

The chart, however, also poses a serious puzzle. Leonhardt concludes that: “from almost any individual’s perspective, college is a no-brainer.” If that is true, then, in a well-functioning market, we would expect that this extraordinary increase in the payoff to college would have led to a large increase in the supply of college graduates. In fact, as economists have documented for several decades now, the supply of college graduates decelerated at about the same time that the return to college started to increased. The share of college graduates in the workforce continued to grow after the early 1980s, but at a slower, not a faster, pace than it had in the 1960s and 1970s.

Unless we think that the main reason young people aren’t going to college is because they don’t know that the average return to a college degree is very high (and always has been), then the much more interesting question is why it is that more young people aren’t going to college? Given the size of the returns to college –Leonhardt cites numbers from MIT economist David Autor that suggest that the present discounted value of college is roughly $500,000– the barriers must be substantial.

I’ll offer two quick reasons why college may be, in practice, less of a “no-brainer.”

First, as Heather Boushey and I (and, more recently, MIT economist Frank Levy and colleagues) have argued, not everyone who goes to college receives the average financial return. A non-trivial portion of college graduates earn less than the average otherwise comparable high school graduate. (In the current issue of Science, which the Upshot piece refers to, David Autor makes this same point: “Although the average college graduate earns substantially more than the average high school graduate, the least successful college graduates may earn substantially less than the median among high school graduates, and the most successful high school graduates may earn substantially more than the median among college graduates.”) At least some high school graduates on the fence about college might realistically expect –because of their grades, test scores, health situation, work responsibilities, or family obligations– that they will find themselves with a below-average pay-off to college.

Second, as Heather and I also argued (and as Ben Casselman notes in a post today at 538), the big financial returns to college depend heavily on finishing your degree, but more than 40 percent of those who start college for the first time don’t finish within six years. Those who don’t finish have little to weigh against their lost earnings, lost years of labor-market experience, direct outlays in tuition and fees, as well as any student debt they might have acquired. Again, from the point of view of a young high school graduate considering college, knowing that there is a 40 percent chance that you will start, but won’t finish is pretty discouraging –again, especially if you have reasons to believe that you might more be more likely to be in the 40 percent than in the 60 percent. (Autor also makes this point in Science: “for students who acquire substantial student debt but do not complete the college degree, it is far from certain that college will prove a good investment.”).

That I can identify, Leonhardt mentions only one reason that we don’t have more college graduates and does so only in passing. He quotes Autor as saying “we have too few people who are prepared for college.” But, if this is the main barrier to increasing the share of workers with a college degree, then we are in more trouble than Leonhardt seems to think. If we have not prepared enough young people to do college work, then we can hardly expect that these unprepared young people will finish college even if they start or that they will receive the high average returns earned by current graduates.

I may be wrong about why young people aren’t going to college in bigger numbers, and almost certainly there are other factors at play, but knowing why the young aren’t going to college in much greater numbers is a far more important question than knowing whether college is “worth it” “on average” and “all-else equal” for the people who have already gone.

(This post originally appeared on the CEPR blog. Updated to correct authorship of Benson, Esteva, and Levy paper.)

Cheese Eating Jobs Machine

On his blog today, Paul Krugman has a nice shout-out to a report that Dean Baker and I wrote for CEPR way back in 2006.

In that eight-year-old report, Dean and I made the point that, despite widespread crowing about the US “jobs machine,” 25-to-54 year olds (what economists sometimes call “prime-age” workers) were more likely to have a job in France than in the United States.

Today, Krugman posts an eye-popping chart documenting that the gap between the United States and France has grown to a chasm:

Employment rates 25-54 year olds, US and France, 2000-2013

Source: Paul Krugman, 2014.

The French employment advantage among the “prime-age” population is much bigger now than in it was before the Great Recession.

The same chart also shows that the gap between the two countries is narrowing slowly. US employment rates are creeping up. And French employment rates are falling steadily –dragged down by the weight of Europe’s deeply misguided commitment to economic austerity.

Infographic on young black grads

My CEPR colleagues Shawn Jefferson and Milla Sanes designed this excellent infographic to accompany our new report (pdf) on the labor market outcomes of black recent college graduates.

Black recent college graduates

As Heidi Shierholz, Alyssa Davis, and Will Kimball have documented extensively in a recent report for the Economic Policy Institute, the Great Recession has been very hard on young college graduates. In a CEPR report released yesterday, Janelle Jones and I show that the tough economy has been even harder on black recent college graduates.

In 2013, the unemployment rate for black grads (ages 22 to 27) was 12.4 percent, more than double the already elevated 5.6 percent rate for all graduates in the same age range:

Unemployment rate for recent college graduates, 1979-2013

And over half (55.6 percent) of the black college graduates that did have jobs were “underemployed” in occupations that typically do not require a college degree:

Underemployment rate for college graduates, 2003-2013The report has been written up already at Vox, the Wall Street Journal (once on the RTE blog, once in their Opinion section), ThinkProgress, and the Huffington Post.

UPDATE May 30, 2014: More coverage of the report, including excellent stories in Al Jazeera America and The Atlantic, and a superb essay by Tressie McMillan Cottom at the Washington Post‘s new PostEverything page.

Piketty and Policy

Early on in his (rightly) highly complimentary review of Thomas Piketty’s Capital in the 21st Century, Paul Krugman declares: “This is a book that will change both the way we think about society and the way we do economics.” Krugman is certainly correct about the impact that Capital in the 21st Century will have on the way we think about the world. But, I wonder whether the book will have much impact on the progressive policy agenda in the United States.

Last week, when Piketty was in Washington, DC, I attended one of his book events (at the Economic Policy Institute with co-sponsorship from the Washington Center for Equitable Growth) and watched another (at the Urban Institute) online. At those events, as in the book, Piketty warned that unless we can lower the rate of return to capital (r) below the rate of growth (g) in the overall economy, it will be very hard to block rising inequality in income and wealth at a national and a global scale. Piketty’s preferred policy for getting “r” below “g” is a steep, global, progressive wealth tax.

At the first event, EPI’s Josh Bivens argued that one important implication of the book is that if we want to combat inequality, we should pursue policies that lower r by raising the bargaining power of workers relative to the owners of capital and what Piketty calls “supermanagers.” Among other options, Bivens specifically mentioned full-employment macroeconomic policy, increased unionization, and a higher minimum wage. These policies, he said, would “push r and g closer together” helping to reduce inequality. In her comments at the same event, Betsey Stevenson, one of the members of the Council of Economic Advisors, pushed policies that would raise the growth rate (g), including universal preschool programs and other measures.

At the second event, my colleague, Dean Baker called for policies aimed at lowering the return to capital by greatly reducing economic rents in the financial sector and other parts of the economy that benefit substantially from various forms of government protections, including pharmaceuticals and health care.

In both sessions, Piketty had the same polite, but blunt, response. The policies proposed by Bivens, Stevenson, and Baker were all well and good, but ultimately they are only “complements” and “not substitutes” for his global, progressive wealth tax. At EPI, he said (about minute 58:00): “These are all very useful policy options” but “…we are not going to replace progressive taxation by a pre-school program and patent law [reform], and whatever.” (The “whatever” here reads harsher in print than it sounded live or on the video. I believe Piketty meant it more in the spirit of “and the other policies you mention.”)

At the Urban Institute, Piketty referred to Dean’s list of proposals, including a financial transactions tax, patent law reform, a universal public health system, and other policies, and said (about minute 53:00): “…I don’t think it is going to be enough to change much [the] r-g finding I am showing.” He continued: “I am in favor of your better patent law [and] public health system… But, do you really, seriously believe that a public health system is going to bring down [the high rate of accumulation of wealth]?”

(An important reason Piketty believes that Dean’s proposals are not substitutes for Piketty’s preferred progressive wealth tax is because he does not think that economic rents stemming from imperfect competition are an important part of the return to capital. Rents could be significant in “subsectors” of the economy, Piketty says, but his analysis suggests that r will exceed g, even if the economy is perfectly competitive.)

Back to my initial question: does Capital in the 21st Century point progressive policy in a new direction? Piketty makes one core recommendation: a high, progressive, tax on wealth, preferably implemented on a global scale to minimize evasion. I know very few on the left that would disagree with that as a policy goal. I know even fewer people of any political stripe who think that such a policy stands much of a chance of happening any time soon.

By Piketty’s reading of his own book, however, nothing short of a global progressive wealth tax (or a repeat of a succession of cataclysmic events such as World War I, the Great Depression, and World War II) will be enough to prevent the further rise of inequality.

So, what is to be done?

Well, if Piketty is right, we push for a global wealth tax and the useful –but insufficient– policies that progressives have advocated for decades.

If Piketty is wrong, we push for a –highly improbable– global wealth tax and the useful policies that progressives have advocated for decades.

Let’s call this Piketty’s Wager.

(This post originally appeared at the CEPR blog.)

Public-Sector Collective Bargaining in the States

Thousands gather inside Madison Wisconsin's capitol rotunda to protest Governor Walker's bill on February 16, 2011.

Source: Joe Rowley (Wikimedia Commons).

Milla Sanes and I have a new CEPR report out today on the regulation of public-sector bargaining at the state-and-local level.

The first two paragraphs give a short summary of the 68-page document:

While the unionization of most private-sector workers is governed by the National Labor Relations Act (NLRA), the legal scope of collective bargaining for state and local public-sector workers is the domain of states and, where states allow it, local authorities. This hodge-podge of state-and-local legal frameworks is complicated enough, but recent efforts in Wisconsin, Michigan, Ohio, and other states have left the legal rights of public-sector workers even less transparent.

In this report, we review the legal rights and limitations on public-sector bargaining in the 50 states and the District of Columbia, as of January 2014. Given the legal complexities, we focus on three sets of workers who make up almost half of all unionized public-sector workers: teachers, police, and firefighters, with some observations, where possible, on other state-and-local workers. For each group of workers, we examine whether public-sector workers have the right to bargain collectively; whether that right includes the ability to bargain over wages; and whether public-sector workers have the right to strike.

We see the report as very much a work-in-progress. We plan to update the contents as we receive new information and as state law changes. Please let us know if you think we got anything wrong.

The Mobility Myth

A short clip from a great short piece by James Surowiecki in The New Yorker:

“Increasing economic opportunity is a noble goal, and worth investing in. But we shouldn’t delude ourselves into thinking that more social mobility will cure what ails the U.S. economy. For a start, even societies that are held to have “high” mobility aren’t all that mobile. In San Jose, just thirteen per cent of people in the bottom quintile make it to the top…

“More important, in any capitalist society most people are bound to be part of the middle and working classes; public policy should focus on raising their standard of living, instead of raising their chances of getting rich. What made the U.S. economy so remarkable for most of the twentieth century was the fact that, even if working people never moved into a different class, over time they saw their standard of living rise sharply.”

CBO and the minimum wage, Pt. 2

In a post yesterday, I reviewed a long list of ways in which Tuesday’s Congressional Budget Office (CBO) report embraced arguments made by supporters of the minimum wage. In this post, I want to make some observations on CBO’s analysis of the employment effects of the minimum wage, the aspect of the report that has received, by far, the most attention in the media.

In a major departure from earlier CBO analysis, the range of likely employment outcomes in the new CBO report includes zero.

Headlines have focused on CBO’s “central estimate” of the “change in employment” from an increase in the federal minimum wage to $10.10 –a loss of 500,000 jobs. But, the “likely range” in the CBO forecast runs from a “[v]ery slight decrease to -1.0 million workers.”

A mid-range estimate of 500,000 jobs lost, with a high-end estimate of one million jobs lost, is obviously bad optics for the proposed increase. Nevertheless, recognition in a CBO document that the “likely range” of employment effects effectively includes zero (a “very slight decrease”) is, as far as I can tell from reviewing several past CBO evaluations of the minimum wage, completely unprecedented.

Two CBO reports from the late 1990s, for example, assume that a 10 percent increase in the minimum wage would reduce employment of teenagers by between 0.5 percent and 2.0 percent, with a “smaller percentage reduction for young adults (ages 20 to 24).” (CBO, 1999, p. 4) A 2001 CBO report was not as explicit about its assumptions, but the estimated employment impact did not include zero (200,000 to 600,000 jobs lost).

Including zero in the range of plausible employment outcomes –for the first time ever– ought to feature more prominently in the discussion of the report and in the evaluation of the proposal on the table, especially considering that the proposal involves an increase in the minimum wage of almost 40 percent.

More than two decades of research that has questioned the negative employment impact of moderate increases in the minimum wage is slowly entering into standard analysis.

The CBO chose not to referee a deep divide in the economics profession and, instead, awkwardly split the difference on estimates of the employment effects.

The appendix to the CBO report provides details on specific assumptions about the employment effects of the minimum wage, but offers little on how CBO arrived at those specifics.

Two assumptions drive most of the employment results. The first is the assumption that a 10 percent increase in the minimum wage would reduce teen employment by 1 percent with a “likely range” from close to zero (“a very slight negative amount” p. 23) to as high as 2 percent. The second assumption is that the effect on low-wage adults would be “about one-third” (p. 25) of the estimated effect for teenagers.

The CBO cites numerous studies in connection with the choice of these “policy elasticities.” But, non-specialist readers won’t realize that none of CBO’s parameters actually appear in any of the studies cited. Probably the most prominent minimum-wage critics, David Neumark and William Wascher, for example, argue that a 10 percent increase in the minimum wage reduces teen (and less-skilled worker) employment by 1 to 2 percent –not the 0 to 2 percent used by the CBO. Other critics would put the range between 1 and 3 percent, for a mid-range of 2 percent. Meanwhile, the research by Arindrajit Dube, Michael Reich, Sylvia Allegretto, and William Lester –the group of economists that in recent decades has most informed minimum-wage supporters– puts the employment effect on teens as centered close to zero, with a 10 percent increase in the minimum wage associated with between a 0.6 percent decrease and a 1.3 percent increase in employment (this range taken from Allegretto, Dube, Reich, and Zipperer, Table 3, columns 5-8).

As Michael Reich has noted, CBO’s range lies somewhere between the two camps, with no explanation from CBO as to how it chose to weight the two very different sets of estimates. Siding with the critics of the minimum wage would have produced higher estimates of job loss than what CBO published. Siding with the large and growing body of research finding little or no employment effect would have produced much lower estimates of loss and not ruled out the possibility of job gains.

The CBO breaks with the existing research by assuming significant job loss for low-wage adults.

As I mentioned earlier, the CBO assumes that the employment effects on adults would be one-third of what they would be for teenagers. As the CBO notes, there is “much less research … on the responsiveness of adult employment to minimum-wage increases than on the responsiveness of teenage employment.” In fact, the idea that the minimum wage has essentially no effect on adult workers has long been close to the consensus view within the economics profession. In a large review of the literature at the beginning of the 1980s, for example, Charles Brown, Curtis Gilroy, and Andrew Kohen concluded that even the “direction of the effect on adult employment is uncertain in the empirical work, as it is in the theory” (p. 524) –and that was before the wave of research since the early 1990s that has questioned the negative employment impact of the minimum wage. Indeed, this view has been so standard, that the CBO studies from the late 1990s and early 2000s that I cited earlier appear to assume no employment effects on adults. Since the CBO concludes that 88 percent of workers affected by a minimum-wage increase are not teenagers, this unconventional assumption has a large impact on their final calculations.

Critics and opponents of the minimum wage agree that employment effects are not the only aspect of the minimum wage that should factor into decisions about the policy.

In their book Minimum Wages, critics David Neumark and William Wascher write:

“But the existence of disemployment effects does not necessarily imply that minimum wages constitute bad social policy. As with many government rules and regulations, a higher minimum wage entails both benefits and costs. Thus, the question is not whether there are any costs to a higher minimum wage, but instead whether the trade-offs between the costs and the benefits are acceptable…” (pp. 141-42)

And minimum-wage supporter Jared Bernstein makes a similar point: “even if [critics] are right…the beneficiaries far outweigh those displaced.” (Or see liberal columnist Harold Meyerson’s tweet: @HaroldMeyerson: CBO: Minimum wage hike will help 33 workers for every 1 it hurts. Pretty damn good ratio.)

Several commentators have made a more forceful version of this argument, suggesting that if the minimum wage isn’t causing some amount of job loss, it probably isn’t being set high enough. The unconventionally liberal Matt Yglesias, for example, writes:

“If the White House genuinely believes that a hike to $10.10 would have zero negative impact on job creation, then the White House is probably proposing too low a number. The outcome that the CBO is forecasting—an outcome where you get a small amount of disemployment that’s vastly outweighed by the increase in income among low-wage families writ large—is the outcome that you want. If $10.10 an hour would raise incomes and cost zero jobs, then why not go up to $11 and raise incomes even more at the cost of a little bit of disemployment?”

This view is shared, in almost identical terms, by the not-so-liberal Josh Barro in a post titled
If Your Minimum Wage Increase Doesn’t Raise Unemployment, You Didn’t Raise The Minimum Wage Enough:

“…a minimum wage increase can cause a modest rise in unemployment and still be a good policy idea, so long as it has more than offsetting positive effects. And the minimum wage trade-off presented by CBO looks awfully favorable. For every person put out of work by the minimum wage increase, more than 30 will see rises in income, often on the order of several dollars an hour. Low- and moderate-income families will get an extra $17 billion a year in income, even after accounting for people who get put out of work; for reference, that’s roughly equivalent to a 25% increase in the Earned Income Tax Credit.”

We can only ask CBO to lay out the likely consequences of particular policies. Once trade-offs are involved, we need to make the value judgments that CBO can’t make for us. Much of the media coverage has hyped the mid-range job-loss number and what that number means for the political prospects of proposed increase, but the same coverage has done little or nothing to explore any trade-off between higher incomes and fewer jobs.

We need to have a realistic understanding of the low-wage labor market.

A range of people –young, old, men, women, white, black, Latino, Asian, full-time and part-time, less-educated and college-educated– work in low-wage jobs, many for large parts of their working life. But, an important feature of low-wage jobs is that they tend to have high turnover. Even if half the workers in a low-wage workplace are in stable long-term jobs, the other half of positions might turnover completely once or even twice in a year.

High turnover is an important context to keep in mind when evaluating the costs and benefits of the minimum wage. Even if the CBO’s central estimate of job loss is correct, very few low-wage workers will receive pink slips. Given high turnover, employers who want to reduce employment are much more likely to make any adjustments implied by the CBO estimates through attrition –failing to replace a few percent of the workers who leave on a regular basis.

Workers looking for jobs at the new, higher minimum wage may be looking in a slightly smaller job pool, for a slightly longer period of time. But, when they find a job, it will pay substantially more than the job they would have found somewhat more quickly at the old, but lower minimum wage. Given this reality and the CBO numbers, which suggest that the minimum wage yields a large net transfer of income from employers to low-wage workers as a group, it is hard to imagine that any low-wage workers would be worse off on an annual basis after the minimum-wage increase. (As my colleague Dean Baker puts it, unlike many other policies, including trade agreements, patent protection, or fiscal austerity, there are no “designated losers” with the minimum wage.)

Whenever we’re talking about employment effects, we need to be sure that the conversation includes macroeconomic policy.

In the current context of high unemployment, the easiest way to make up for negative employment effects of any policy is to be sure that we are pursuing appropriately expansionary macroeconomic policy. To a first approximation, labor-market institutions such as the minimum wage, unemployment insurance benefits, and unions determine the distribution of wages, benefits, and incomes, while macroeconomic policy determines the level of employment. There may be circumstances where labor-market institutions begin to act as important constraints on employment, but it is hard to argue that we are anywhere near there now, or even that we have been anywhere close in the last three decades. (For example, we saw no signs of rising inflation at the end of the 1990s and into 2000, even when the unemployment rate hovered for an extended period near 4 percent.) If opponents of the minimum wage are genuinely concerned about the fate of low-wage workers, they should be pushing for appropriately expansionary macroeconomic policy, not fighting policies that make low-wage workers as a whole substantially better off.

CBO and the minimum wage, Pt. 1

You wouldn’t know it from the headlines, but on almost every issue in dispute, yesterday’s Congressional Budget Office (CBO) report on the minimum wage sided with supporters of increasing the federal wage floor. The only major exception –which has so far dominated the media coverage– was with respect to the employment effects of a minimum-wage increase, where the CBO decided to saw the baby in half.

First, let’s look at all the disputes where the CBO accepted the numbers and the reasoning of supporters.

The minimum wage will directly affect tens of millions of workers.

Opponents of the minimum wage like to cite Bureau of Labor Statistics (BLS) numbers that suggest that there are only about 1.6 million minimum-wage workers, ignoring that this figure refers only to worker who earn exactly the federal minimum wage of $7.25 per hour.

CBO, instead, estimates that about 16.5 million workers would receive a wage increase because the CBO correctly factored in that millions more workers who earn between the current federal minimum wage and the new proposed level of $10.10 would also receive a pay increase.

The CBO estimate of the total direct beneficiaries is almost identical to the 16.7 million worker estimate produced by the Economic Policy Institute and used widely by supporters.

The minimum wage will indirectly raise the wages of millions more.

Opponents downplay “spillover” effects of the minimum wage, that is, they say that the minimum wage is unlikely to have any impact on the wages of workers earning above the federal floor.

The CBO, however, estimates that about 8.0 million workers who otherwise would have earned just above $10.10 in 2016 would also receive a boost after the increase, as employers adjust internal pay scales to reflect the new lower wage at the bottom.

The CBO estimate is somewhat lower than EPI’s projection of 11.1 million workers, but still constitutes solid recognition of the importance of “spillover” effects and the capacity of the minimum wage to influence the broader wage distribution.

The beneficiaries of a minimum-wage increase are overwhelmingly not teenagers.

Opponents argue that the typical minimum wage worker is a suburban teenager.

CBO’s analysis includes all workers that would receive an increase in the minimum wage and concludes that only 12 percent of these low-wage workers are teenagers, 10 percent have a college degree, and more than half (53 percent) work full time. These numbers mirror closely the demographic data produced by EPI and widely cited by supporters of the increase.

The large majority of benefits of a minimum-wage increase would go to low- and middle-income families.

Opponents claim that the minimum wage is not well targeted to low-income families. But, CBO says 65 percent of the increase in earnings would go to families with incomes below three times the federal poverty line (or, roughly, about $60,000 for a family of three). Again, the CBO figures are close to EPI’s estimates, which conclude that about 69 percent of benefits go to families with incomes below $60,000, with 23 percent going to families with incomes below $20,000.

The minimum wage will reduce poverty.

One of the sources most frequently cited by opponents of the minimum wage, David Neumark and William Wascher’s book, Minimum Wages (2008), does not pull any punches on the impact of the minimum wage on poverty: “…there is essentially no empirical evidence indicating that minimum wages have beneficial distributional effects. Instead, the research tends to find either no evidence of distributional effects or evidence that minimum wages increase poverty.” (p. 189)

But, the CBO report rejected this reading of the research and concluded that an increase to $10.10 would, on net, lift 900,000 people out of poverty.

The CBO’s estimate of the size of poverty reduction is more conservative than recent projections produced by economist Arindrajit Dube, who concluded that increasing the minimum wage would reduce poverty by between 4.6 million and 6.8 million people, after full implementation. But, CBO clearly believes that –even after employment losses– the minimum wage is an anti-poverty tool.

The minimum wage is a form of stimulus.

The CBO also acknowledged and accepted the economic logic of supporters of the minimum wage who argue that by increasing the incomes of low-wage workers –who tend to spend a very high share of what they earn– a minimum-wage increase would act as a stimulus to the broader economy.

CBO writes: “On balance, according to CBO’s analysis, raising the minimum wage would increase demand for goods and services … [by shifting] 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 … overall spending increases.” (p. 27)

CBO’s estimate that this stimulus effect would “boost… employment by a few tens of thousands of workers in the second half of 2016” is in the ballpark of EPI’s estimate of about 85,000 jobs through minimum-wage stimulus.

EITC and minimum wage are complements.

Whenever efforts to increase the minimum wage gain momentum, opponents suggest expanding the Earned Income Tax Credit (EITC) instead. (The EITC is a refundable tax credit that boosts the after-tax wages of low-wage workers in low-income families, especially those with children.) Opponents see the minimum wage and the EITC as competing with one another. Supporters of the minimum wage, though, see the two policies as strongly complementary.

The EITC, in a straightforward way, increases the incentive to work. As a result, the EITC draws more people into the labor market and induces others who already have jobs to work more hours. The resulting increase in labor supply drives down the market wage (that is, the wage before EITC benefits are paid), which lowers employers’ labor costs. The EITC was designed as a subsidy to low-wage workers, but it also effectively functions as a tax-payer subsidy to low-wage employers. The minimum wage puts a limit on the size of that subsidy to employers.

The two policies work well together. The EITC raises wages for low-income workers to where a minimum wage of the same level would likely cause job loss. Meanwhile, the minimum wage ensures that the benefits of the EITC go to workers, not employers.

CBO acknowledges these important issues, citing research by David Lee and Emmanuel Saez, as well as Jesse Rothstein, and concludes: “An increase in the minimum wage would shift some of that benefit [of the EITC that accrues to employers, rather than to workers] from employers to workers by requiring the former to pay the latter more.” (p. 15)

On all of these issues, the CBO concluded that supporters of raising the minimum wage were right and opponents were wrong. According to CBO, raising the minimum wage to $10.10 per hour by 2016 would directly raise the wages of over 16 million workers and indirectly raise the wages of another 8 million. The beneficiaries are overwhelmingly adults, most working full-time. The benefits are well targeted, with the large majority going to low- and middle-income families. The CBO believes that the minimum wage will lift almost one million people out of poverty. The CBO also endorses both the idea of the minimum wage as stimulus and the idea that the minimum wage and the EITC are policy complements, not substitutes for one another.

Tomorrow, I’ll turn to the CBO analysis of the employment effects.

(This post originally appeared on the CEPR blog.)