Does Increasing the Minimum Wage Stimulate the Economy?
Generally speaking, a modest increase in the minimum wage will increase household spending and thus stimulate the economy. However, this can be offset by job loss or hour reduction, inflation, and other factors.
Thus, as you may already know, there are two valid arguments about the Minimum Wage Debate, one for, one against (notice that neither argues with the premise that increasing the minimum wage stimulates the economy in the short term, they are simply arguing about everything else).
The arguments for and against are:
- AGAINST: “Raising the minimum wage, by its very nature, simply redistributes existing resources. The money to pay higher wages either comes from customers, in the form of higher prices; from employers, from lower profits; or, most regrettably, from other workers who lose their jobs or have their hours or benefits cut.”
- FOR: “A higher minimum wage will stimulate the economy and be good for businesses as low-income workers spend more money and redistribute resources. Wages haven’t kept up with inflation. Correction is overdue.”
In this case, unlike with many other subjects, neither argument is fully right. Both arguments are valid, but both are dependent on the exact fiscal policy being suggested, the general health of the economy, and a host of other factors as expressed below.
The Chicago Fed said it best back in 2013, “Proponents of minimum wage increases often claim that minimum wage hikes will significantly boost the economy. We are skeptical that minimum wage hikes boost GDP in the long run. Nevertheless, we do find evidence that putting money into the hands of consumers especially low-wage consumers, leads to predictable increases in spending in the short run.” In other words, both sides are half right, despite their instance on being fully correct.
TIP: The reason the minimum wage conversation is coming up is that it has failed to rise with inflation. The federal minimum wage has risen steadily over time in “nominal” dollars (in dollars unadjusted for inflation), but it has declined since the 1980’s in “real” 2017 dollars (in dollars adjusted for inflation). Thus, the general idea is to raise wages to account for that. The logic is there, debt and inflation mean more and more money is needed to stay afloat in America, the logistics are less clear-cut and involve a close inspection of the labor market and fiscal policy. See Minimum Wage – U.S. Department of Labor – Chart1.
Labor Markets and Minimum Wage: Crash Course Economics #28. Labor markets, the who and what of the conversation.
Fiscal Policy and Stimulus: Crash Course Economics #8. Fiscal Policy, the other aspect of the conversation.
FACT: In 2012, according to a Chicago Fed Letter, out of 117 million workers in the US, 69 million were hourly, and about 39 million made $10 an hour or less. Thus, when politicians say “fight for $15” we aren’t just talking about a teen fumbling around a burger joint, we are talking about a substantial share of America’s 320 million. Still, we don’t want to address every misconception here; we only want to know if the net effect is one of stimulation or not.
FACT: According to WhiteHouse.Gov, since 1950, real per capita gross domestic product (GDP) has increased 246%, and labor productivity has grown 278%, but the minimum wage’s real value has fallen. The minimum wage peaked in 1968 at 54% but fell to only 35% in February 2014 relative to the mean wage
AM 770 KTTH $15 Minimum Wage Debate. Liberals and conservatives debate the $15 minimum wage in Seattle.
Here are factors to consider about a Minimum Wage Hike:
- Economic policy changes can be examined using “dynamic scoring.” Dynamic scoring predicts the impact of fiscal policy changes by calculating reactions to policy changes. When discussing a minimum wage increase we aren’t just talking about short-term stimulation to the economy, we are talking about changes in hiring practices, long-term effects, household behaviors, and other factors of supply, demand, and economy.
- While we can do stress testing (asking “what if” questions like “what happens if there is a recession, how does that effect things?”), we can’t predict the future. Thus, even when we can reasonably predict what will happen, we can’t know for sure. In a recession, a minimum wage increase may be a worse idea than in an economic boom.
- Impacts can be different over the short and long term. For example, a wage hike may stimulate growth in the short term, but limit job growth in the long term.
- When too much money is injected into an economy too quickly, it can cause inflation. If wages are raised too quickly, then more money in more pockets just means more demand, it doesn’t mean more supply. Without additional supply, prices can inflate as a response to a cash injection.
- An employer can respond to wage increases by cutting hours and jobs. If wages are raised to a threshold that warrants a wide-spread response in hiring practices by employers, then a wage increase can have a net effect of people working fewer hours for more money rather than a net effect of more money in the pockets of minimum wage earners.
- Employers can also respond to a wage hike by increasing jobs. If the economy is stimulated, then demand increases, it can result in the need to hire more workers. This job growth may fade over time, but it can be said to be part of the cycle.
- Different states, regions, and industries have different tolerances and needs. Some large industries with high profit margins may absorb an increase easily, while other industries may not. A small rural company might struggle where a small urban company might not. A fast-food restaurant may struggle more than other industries. The problem with a one-size-fits-all wage hike is that America’s 50 states include many diverse entities with vastly different needs. For one of many examples, higher wages could mean fewer jobs and higher prices at fast-food restaurants, and that can offset any potential long-term boost to a local economy depending on the type of business we are looking at.
- The payroll tax is attached to wages. An increase in wages means a greater cost for employers. This cost is not something the average employee realizes. Roughly speaking, as an example, $10 per-hour for the employee means roughly $13 per hour for the employer in payroll taxes plus compensation, while $15 per hour for the employee means roughly $19 per hour in expenses for the employer.
- As of early 2017, the federal minimum wage has failed to keep up with inflation. That means every year it gets harder and harder for low-wage workers to survive and thrive.
- Economy aside, social benefits are also important. A minimum wage increase may reduce violent crime and lift millions of people of color out of poverty… even if the initial jolt is just a distribution.
- Low wages will almost always lead to more jobs and more hours, allowing unskilled and marginal workers to enter the workforce.
- Wage fixing aside, wages rise naturally via competition. If wages aren’t rising, perhaps the problem is not one that needs to be solved by a mandated minimum wage. Is something else keeping wages low? Ideally, the government shouldn’t need to set the minimum wage. Ideally, businesses would be meeting the demand. What is happening here?
- Not everyone is going to benefit equally from a wage hike. Minorities and women in southern states have the most to gain, but most states and regions would benefit. At the same time, those who need the hike the most are those living in cities and high-income regions where demand and state law as often already increased wages beyond the federal minimum.
Given all the above, we can say an increase in the minimum wage would jolt the economy, even if just through redistribution to start. It would also likely result in some job losses. It would probably have a social benefit. This conversation gets over-simplified for a good reason. It is complex. Still, we can look at some facts here, and those include pointing out that both the arguments for and against have merit. “It is true that increasing the minimum wage would stimulate the economy, at least in the short term.” Other concerns don’t negate this truth; they augment it and should give us pause.
TIP: See Minimum Wage Mythbusters by the Department of Labor for more minimum wage facts and myths.
Economics: Is Raising Minimum Wage A Bad Idea? – Learn Liberty. The arguments against raising the minimum wage.
FACT: Congress sets the minimum wage, but it doesn’t keep pace with inflation. Because the cost of living is always rising, the value of a new minimum wage begins to fall from the moment it is set.
Should We Raise the Minimum Wage?. The arguments in this piece are generally for of higher wages. Friedman said, “no never, it is all socialism.” It must be simple to only have one point, but we are discussing both points, and that is much more complex.
FACT: Since 1938, the federal minimum wage was increased 22 times. For more than 75 years, real GDP per capita has steadily increased, even when the minimum wage has been raised.