Raising minimum wage would create jobs

Here’s Felix Salmon, endorsing the doubling of the minimum wage.

Yeah, that’s right: doubling — from a poverty-level $7.25/hour to a living wage of $15/hour. Salmon is seconding the suggestion by millionaire capitalist Nick Hanauer, who points out that “If the minimum wage had simply tracked U.S. productivity gains since 1968, it would be $21.72 an hour — three times what it is now.”

The objections to such a scheme are as easy to anticipate as they are to refute. “But that would bankrupt small businesses and force companies to stop hiring!” cry people who desperately want some reason to oppose this, even though those reasons aren’t necessarily true.

Here’s Salmon, offering six reasons doubling the minimum wage would be a “win-win-win-win-win-win.” (I’ve added the numbering here because I want this to be read):

1. 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.

2. 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.

3. 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.

4. 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. … 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. … 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.

5. 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. …

6. … 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.

I don’t doubt that some Mom & Pop operations might struggle to pay this higher wage. The local pizza shop now paying $10/hour would feel the pinch of having to pay $5 more for its workforce. But I doubt they’ll want to lay off any workers to cover that cost, because 51 million other American workers just got a raise and they’re going to be spending part of their next, bigger paycheck buying pizza.

Will that massive increase in demand offset the increased cost of paying those wages? I don’t know — I haven’t crunched all those numbers and I can’t account for all those variables. But the people completely ignoring this increase in demand haven’t done the math either, and their insistence that Very Good News for millions of customers is irrelevant to the bottom line of all those Mom & Pop businesses is surely wrong.

Is $15/hour too much of an increase? I don’t know that either. But I do know that $7.25 is too low, and I don’t see any reason to start the bidding at $7.26 — that’s not how negotiation works.