President Barack Obama and the large majority of the congressional Democrats are making a hard push to raise the minimum wage in America from $7.25 to $10.10.
The president brought the issue back to the forefront during his State of the Union Address. Since then, speculation on the effects of an increase in the minimum wage have run rampant.
The Congressional Budget Office (CBO) shed some light Tuesday on the ramifications of an increase in the minimum wage would have. Its findings forecasted that an increase would bring approximately 900,000 citizens above the poverty line. While this would be an impressive outcome of the change in policy, a more troubling statistic that the CBO also forecasts is the loss of 500,000 jobs by the end of 2016.
Democrats are strongly opposing the CBO’s report, claiming that the number of jobs lost is grossly over-predicted. The CBO did state that its method of forecasting is not an exact science and that there is some room for interpretation. The last time it forecasted the increase in minimum wage was in 2007 to $7.25.
“The CBO report acknowledges that long-term conclusions on the effect of the minimum wage are difficult to predict. In 2007 – the last time Congress voted to raise the federal minimum wage to the current $7.25 rate – CBO reported that the potential employment and unemployment impacts of raising the federal minimum wage rate to $7.25 per hour are difficult to predict, but are likely to be small,” according to a USA Today article.
If this is still the case in this year’s forecasts the congressional democrats have a valid argument on the CBO’s findings.
The unemployment rate in the U.S. currently stands at 6.7 percent which is close to the Federal Reserve’s target of 6.5 percent. However, if the CBO’s forecasts are correct, it would be a major blow to the progress the Fed has made to this point.
The Fed has decreased their bond buying program (quantitative easing) from 85 billion a month to 65 billion over the last three months. The possibility of a further decrease in the bond-buying program is contingent on the health of the U.S. economy, as stated by economic indicators such as the unemployment rate.
An increase in the unemployment rate would discourage more taper for the immediate time being, which could hinder the Fed’s ability to taper.
Equity markets are affected by the Fed’s actions now more than ever. A change in the minimum wage policy would create ambiguity in the Fed’s actions, which would in turn create uncertainty in the financial markets.
Investors remain skeptical about the health of the economy and a recent correction is proof of that sentiment. While equity markets seem to have recovered from the correction that plagued returns at the beginning of the new year, a change in the minimum wage has the potential to send shockwaves through the market.
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