Minimum Wage as an Economic Stimulus

An NPR interview with an economist regarding the next scheduled increase in the federal minimum wage said that thirteen million workers would be directly affected. Yeah, I know all that stuff about lost jobs and hours being cut, but three decades in the food business taught me more about service than food. Simple fact is that the service will continue. Tighter schedules, higher skill sets, more multi-tasking and all that... but the jobs will not be gone, just tougher.

Wages paid to minimum wage employees are not being put into savings accounts, you can be certain. Those dollars are being spent. At once, in most cases. Minimum wage jobs go with a paycheck to paycheck lifestyle. These are the people who keep Walmart in business.

So this is my question: To what extent is an increase in the minimum wage a stimulus to the economy?

I did a search and this is what I found...

Three years ago Michigan Democrats were debating the state's minimum wage law.

Michigan House Democratic Leader Dianne Byrum said the legislation would be implemented in three stages of 75 cents, 75 cents and 50 cents, rather than all at once.
Byrum said an increase in minimum wage would be "absolute economic stimulus" because the people who make the minimum wage will spend it locally rather than invest in 401Ks or expensive artwork.
"They're going to spend it in the grocery store," Byrum said. "Maybe they will update their vehicle. They will be purchasing things in the local economy."
An increase would impact 464,000 people in the state, Byrum said. Forty percent of the minimum wage employees in the state are the sole breadwinners, she added.

From the Economic Policy Institute, 2006
There is a growing view among economists that the minimum wage offers substantial benefits to low-wage workers without negative effect. Although there are still dissenters, the best recent research has shown that the job loss reported in earlier analyses does not, in fact, occur when the minimum wage is increased. There is little question that the overall impact of a minimum wage is positive, as the following facts make clear:

• ►If the minimum wage were increased nationally to $7.25:o 14.9 million workers would receive a raise,o 80% of those affected are adults age 20 or over, and 7.3 million children would see their parents income rise.
• ►The best recent research on the economic impact of the minimum wage shows positive effects without job loss. (Twenty-two states plus the District of Columbia have minimum wages above the federal rate, covering 58% of the nation’s labor force.)
• ►The states that have adopted higher-than-federal minimum wages have seen low-wage workers’ incomes rise with no negative side-effects.

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Last month the Wall Street Journal picked up a blogger's comment

“Right now, the national minimum wage is set at $5.85/hr and will get a bump in late July to $6.55/hr followed by another boost to $7.25/hr next July. The Economic Policy Institute says that 5.6 million workers will be affected by this change. Aaronson, Agarwal, and French estimate that a $1 minimum wage increase translates into a $2,000 boost in annual spending. A back-of-the-envelope calculation (assuming that 5.6 million minimum wage earners experience a $1 gain in pay) would put new spending at $11.2 billion. The cost to businesses would be $2.8 billion in increased wages. On the other hand, past research has shown that consumers spent about two-thirds of their stimulus checks back in 2001. This time around, that would translate into an additional $80 billion in spending. So, what’s better, spending $120 billion to stimulate $80 billion in consumption, or $2.8 billion to stimulate $11.2 billion?”

The same blogger added...

Obviously, it's much more complicated than this simplistic scenario. Getting $80 billion in additional spending from minimum wage increases would mean boosting pay way more than $1, which could cause all sorts of unexpected side effects not limited to higher unemployment in the economy. But given the evidence here that workers are quick to spend their income gains perhaps -- assuming it's not very costly for businesses to implement -- even a temporary minimum wage hike could be more cost-effective than a tax rebate.

Naturally he got beat up in the comments by the usual suspects.

I am fully aware of the inflationary impact of any rise in wages. I am also aware that those who are in the best position to improve the buying power of their employees, their most treasured assets, are the very ones least likely to do so by rewarding them with higher wages.

Today's business model is very different from the model of fifty years ago. Back then if a company needed someone with more skills or experience it made a rational selection from among their already-working family of workers and offered them an opportunity to get a promotion. If training and experience were part of the need, those who received them were part of the family.

In today's business environment when a company looks for people with more experience or training it hires someone off the street. They call it the "job market." As a result the infrastructure that once built teamwork is now shot through with internal politics and competition among workers trying either to outwork each other or (just as likely) isolate and shun any peers who make them "look bad" by working "too hard" or being too company-loyal.

But that is a conversation for another day. This post is about advancing the minimum wage.

Update,April 5, 2009:

When this post was published last July no one saw a coming recession triggered by the ticking bombs we now call toxic assets, making their way through the world's investment community like a colony of termites. That explosion was still a few weeks off. (Well actually, Nouriel Roubini and a small group of people listening to him saw what was coming a year before and he got to be a rock star after last September...too late for the rest of us to put our securities into CD's or other liquid assets.)

Today I put up another post, mostly for the record, because I have been getting traffic to this post from Professor Brock Haussamen's excellent and growing site, The Minimum Wage: Information, Opinion, Research.

I've heard nothing about any move to increase the national minimum wage. It's doubtful that any will spring to life in the midst of this recession, but stranger things have happened. This time last year no one would have predicted that a black American First Lady would be pictured arm in arm with the queen of England.