The minimum-wage stimulus

By Felix Salmon

Reuters, June 20, 2013

Nick Hanauer has a good idea today: raise the minimum wage to $15 per hour.

The minimum-wage intervention would kill a lot of birds with one stone: it’s a win-win-win-win-win-win.

First of all, most simply and most cleanly, it would immediately raise the incomes of millions of cash-strapped Americans — precisely the people who most need to be earning more than they’re making right now. A whopping 51 million people would benefit directly, along with 30 million who would benefit indirectly: these are enormous numbers.

Secondly, the cost to the government of putting billions of extra dollars into these workers’ hands would in fact be substantially negative: there’s a strong fiscal case for a $15 minimum wage. We currently spend $316 billion per year on programs designed to help the poor, with the lowest-income households receiving about $8,800 per year. Billions of those dollars would be saved as the workers in question saw their wages rise. And no longer would the likes of Walmart be able to take advantage of implicit government wage subsidies, whereby low-paid workers receive substantial top-up checks from Uncle Sam to supplement their direct income.

Thirdly, the move would constitute a huge economic stimulus program: Hanauer says that it would inject about $450 billion annually into the US economy every year. If you like massive stimulus but you don’t like the idea of the government paying for it, then a higher minimum wage is the program for you.

Fourthly, and crucially, a higher minimum wage would be good for employment. A $450 billion stimulus, delivered directly into the hands of the Americans most likely to spend it, can’t help but create jobs across the economy. Of course, as in any healthy economy, there will be a birth/death model: some employers will see demand soar, while others will see their costs rise and their margins shrink. But there’s empirical evidence to suggest that states which raise the minimum wage when unemployment is high — when there’s a lot of slack in the labor force — then you get faster job growth than in the country as a whole.

This is the particular genius of Hanauer’s suggestion: it’s especially effective right now, and we’re at the perfect point in the economic cycle to implement it. At the depths of a recession, a disruptive move like this can have unintended consequences. But the economy is growing now, albeit not as fast as anybody would like, which means the wind is behind our backs to a certain degree. The bigger economic problem is that employment hasn’t kept pace with economic growth: most of the gains in GDP have gone to capital, rather than to labor. A higher minimum wage would redress the balance somewhat.

Fifthly, insofar as a one-off hike in the minimum wage would be inflationary, that’s a good thing, and exactly what the economy needs. We’re well below the Fed’s target inflation rate right now, and the inflation which might result from this policy would give us a healthy short-term boost in the inflation rate, bringing down real interest rates in a world where the Fed is constrained by the zero lower bound. If you’re worried about the unintended consequences of heterodox monetary policy, then again, a rise in the minimum wage might be very helpful indeed in terms of weaning the Fed off QE.

Finally, there’s the global context. There are surely some US jobs which simply aren’t economic at $15 per hour, and those jobs will end up being lost. (In aggregate, as I say, raising the minimum wage is probably good for employment, but the extra jobs at employers taking advantage of all that extra spending aren’t going to be in the same places as the jobs lost at employers who can’t afford to pay that much.) But the point here is that the US has already done a spectacularly good job of exporting most of its exportable low-wage work. As Hanauer says, “virtually all of these low-wage jobs are service jobs that can neither be outsourced nor automated”. As a result, raising the minimum wage will result in many fewer job losses now than it would have done a couple of decades ago.

Of course, given Congressional dysfunction, there’s zero chance that this will happen. But I can easily imagine someone like Ben Bernanke reading Hanauer’s column and dreaming wistfully about how great it would be if we lived in a country where such things were possible. If we want economic stimulus, higher growth, higher employment, and higher inflation — which we do — then raising the minimum wage is exactly the kind of thing we should be doing.

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