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).
Arguments For and Against a Minimum Wage Hike
The arguments for and against a minimum wage hike 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.”
TIP: Studies constantly show that both sides have merit. Just consider the 2017 studies done on Seattle’s minimum wage hike. It is a myth that, in a complex system like that of the U.S. and its 50 states, that the minimum wage argument can be boiled down to “simple economics” (as the for and against camps will often assert). See: Dueling Studies Come To Opposite Conclusions Regarding Seattle’s $15 Minimum Wage.
Should We Raise the Minimum Wage?
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, welfare cliffs, what region we are talking about (are we talking regional, state, or federal wages?), 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 insistence on being fully correct. Here I’ll note that, generally speaking, the lopsided talking-points we often hear clue us in to how polarized our nation currently is.
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, 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 has 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, but it would probably also 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.
In words, “It is true that increasing the minimum wage would stimulate the economy, at least in the short term. Yet, it is also true this would have negative effects as well.”
Other concerns don’t negate the above truths; they augment it and should give us pause before we go marching for an arbitrary wage hike without other considerations (like exemptions for small businesses with lower profits).
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.
Let us return to 1968 in real minimum wage value; Have you ever considered other ways to improve the social contract result for more people? Why do we believe there should be so many “losers”? How do we provide a better standard of living for all citizens? Do you really need a 6000 square foot home, or a $100,000.00 car? or vacation twice a year? When is enough enough for the “winners”?
And further, how can one as a moral person, look around at all the sick and suffering, and then go on to describe anything happening to them as “winning”? That is the thing. I know many feel this way, that is why so many on the left and right give to charity and pay taxes and start philanthropic organizations, etc… but on moral level there is a lot of room for a deep reflection of our values.
I think Plato’s Republic holds many good metaphors with this in mind. Check out our review of it: http://factmyth.com/books/platos-republic-explained/
Regardless of effects, a government mandated minimum wage is not voluntary exchange and is therefor coercion and unethical. Secondly, it only addresses symptoms not causes. If businesses have the ability to underpay workers, there is another problem afoot regarding labor supply and demand. The problem is the one in need of solution, not the underpayment of low skilled workers.
So I do agree with the second point, that is something that both sides of the argument need to grapple with. The first point I would consider ideological. I don’t think ideology for or against taxation, wages, regulation, etc is going to win the argument alone.
While I think that increasing the minimum wage only helps a small portion of the working poor, I think people often overlook a significant factor in the minimum wage argument: inflation. While there are a few different possible causes for price inflation, the one we experience the most is caused by monetary inflation, which is triggered by a central bank. In the U.S., that would be the Federal Reserve Bank, and its policy to increase the monetary supply by 2-3% every year. There is no good economic reason for this policy.
Like the minimum wage increase itself, monetary inflation doesn’t really stimulate the economy, but only diverts existing resources to different parts of the economy, depending upon where the new money is introduced. It may seem like it is stimulating the economy, but it is only causing an unsustainable boom in some particular area or sector of the economy, and once the economic actors realize that the necessary resources are unavailable for all new projects, an inevitable bust or economic downturn occurs. Austrian Business Cycle Theory argues that the alleged “business cycle” is caused by this monetary inflation by a central bank, not by laissez-faire or the free market.
In a rather vicious cycle, the central bank thinks it can stave off the inevitable bust by continuing to inflate the money supply, and they can, for a while, but not forever. All they’re really doing is creating the illusion of a stimulated economy, hurting wage earners, savers, and people on fixed incomes (including minimum wage workers), by causing price inflation where price inflation really shouldn’t be occurring. They are also continually jostling or skewing the economy, disrupting market interest rates (which in turn discourages the savings necessary for sustainable economic stimulation), and making it harder for supply and demand to achieve a satisfactory equilibrium.
While we can consider minimum wage in isolation, we may be better served to consider the economy as a whole, and all the excessive and contradictory government regulations and policies intended to “fix” the economy. Too often, we can find that the problems government is trying to fix were actually caused by government in the first place. The monopoly on the production of money and the control of the money supply by a central bank is also a cause for concern, and one that affects the minimum wage, interest and savings, productivity and production, and many other things in the economy.
Good thoughts. The minimum wage argument is one where I’m very sure, based on my research and statements of smart people over the ages, that both sides have merit. It makes it a good one to debate in earnest.
If the law were entirely changed, let’s say we increase minimum wage and yearly set an automatic increase proportional to the average rate of inflation nationally. Would that provide incentive for industry to find ways to control inflation through increased production (hiring more workers) and simply not raising prices to maintain obscene levels of profits, but settling for more conservative profits. Added that specific payroll tax-cuts are provided for smaller businesses with a certain # of employees and a special exception for teenage 17 or younger employees in age appropriate jobs, could we not hypothetically eliminate some of the complexities of the market and create a new dynamic in which industry itself truly begins self regulating inflation, rather than manipulating supply against demand in order to maintain the highest price? These manipulations exist in the , OIL, and even agriculture where supply/production is too high, so people are either laid off or yields are left to rot in order to increase prices; or in the pharmaceutical/medical supply world where there are so few people who can afford medical care that the demand for certain drugs is lowered by the lack of prescriptions, therefore they raise prices astronomically to make up for the lack of demand and to meet investor expectations. Something is very wrong with our economy.
Hi just discovered this discussion. I appreciate the summary of pros and cons. I see why people would think there would be a short-term boost to growth but even there I’m not sure if the growth isn’t illusory. You might get the same effect by just printing money and giving it to consumers rather than tinkering with the minimum wage, but more spending without more productivity just bids up the prices of goods, negating any benefit of having more money in your pocket.
Also you don’t mention that the proportion of workers on minimum wage has fallen. Yes, the min wage has less purchasing power now than before (I think because of monetary policy that causes inflation, but that’s another discussion), but this is not as big a problem as you think since there are many fewer workers on that wage now than the last time it was raised. You do mention that wages should be rising over time but you don’t acknowledge that in fact this is what has happened (maybe not as much as it should have).
In short, I think there should be more work establishing how exactly stimulating consumption without increasing productivity can create growth or whether in fact, as I expect, increased consumption on its own simply depletes capital and stunts growth. The precise causal links have to be demonstrated; pointing to correlations isn’t convincing because there are many potential factors at play in a complex economy.
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