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Raising Minimum Wage Significantly Would Boost Economy
Fire Dog Lake
David Dayen

January 3, 2012
View the Original Article

Contrary to the opinion that we’re headed for a consumer-led recovery in 2012, most economic analysts see little movement on consumer spending. Wages have not grown, credit-financed spending has returned and cannot sustain much past where it is, and most of the job growth over the past two years have come in low-wage service sectors. If we’re not going to see consumer growth at the low end, it doesn’t make much sense that autos and homes, the largest consumer purchases you can find, will suddenly fly off the shelves. Consumer spending isn’t likely to collapse in 2012, but it’s also not likely to get measurably better.

In fact, to the extent that there’s any room to run on consumer spending, it will come from the fact that the minimum wage will increase in eight states and several localities across the country. In these states, the minimum wage is indexed to inflation, a campaign priority of Barack Obama back in 2008 that never got past the formative stage. This can actually have a pretty decent impact, if a small one in macroeconomic terms:

"The new minimum wage laws, which also took effect Jan. 1 in Arizona, Colorado, Florida, Montana, Ohio, Oregon, and Vermont, will increase paychecks for more than 1 million workers, according to the Economic Policy Institute (EPI).

In addition, another 394,000 workers will be indirectly affected by the increase. These workers are likely to also see a wage increase, as employers adjust their overall pay structures to reflect the new minimum.

The amount of increase per state ranges from $0.28 an hour in Colorado to $0.37 in Washington. New minimum wages in the eight states now are set between $7.65 an hour and $9.04 an hour, according to EPI. As a result, minimum-wage workers in Arizona will see an average of $298 more in their paychecks this year. In Oregon, the increase is $538."

Giving 1.4 million of the working poor a raise, money they will almost certainly spend, is a great way to boost the economy. And contra the anti-worker types who argue that increases in the minimum wage create unemployment (some front groups even go so far as to indirectly blame federal minimum wage increases that happened in 2007-2009 for the Great Recession), there has been no evidence of “any loss of employment or hours for the type of minimum-wage changes we have seen in the US in the last 20 years,” according to UMass-Amherst economics professor Arindrajit Dube. Anyway, if the money put in worker’s pockets gets plowed back into the service sector, the companies paying the increased wage would come out ahead in the end.

We’re only talking about $366 million added to the economies of those eight states, according to the Economic Policy Institute, and job increases in the four digits. That’s positive but it’s not a game changer. The indexing numbers are not all that large. If you really raised the minimum wage to a living wage, as James Galbraith urges, that would make a material difference in the economy.

"Raise the U.S. minimum wage. By a lot — let’s say, to $12 an hour, from the current rate of $7.25 [...]

What would workers do with the raise? They’d spend it, creating jobs for other workers. They’d pay down their mortgages and car loans, getting themselves out of debt. They’d pay more taxes — on sales and property, mostly — thereby relieving the fiscal crises of states and localities. More teachers, police, and firefighters would keep their jobs.

Would this hurt competitiveness? Not at all. That’s an issue for manufactured goods and traded services like insurance and banking, sectors in which everyone already earns far more than $12 an hour. The jobs we’re talking about are in non-traded services like checkout clerks, haircutters, domestic help, and food-service workers — you can’t run a deep fryer in Terre Haute from Bangalore.

Would prices go up? Some would. But rich people can afford it — and workers would have extra income to pay the higher prices, so most of them would come out ahead. Women in particular would benefit because they tend to work for lower wages."

Galbraith adds that the idea came from a conservative economist looking to reduce low-skill undocumented immigration. But the real winner, Galbraith writes, would be the working class, who would get a “reparation” for having the economy destroyed and their prospects lessened. “It would be an act of justice.” Indeed.