How a Raise in the Minimum Wage Could Benefit Both Workers and the National Economy

Andy PictureOn June 7, 2011, the Center for American Progress hosted a panel discussion on research conducted on minimum wage increases, and the economic effects these increases caused. Participants included: David Madland (Center for American Progress Action Fund), Helen Neuborne (Ford Foundation), Heidi Shierholz (Economic Policy Institute), Celinda Lake (Lake Research Partners), Sylvia Allegretto (University of California, Berkeley), Michael Reich (University of California, Berkeley), and Paul Sonn (National Employment Law Project).

The most basic rationale behind raising the minimum wage is widely known: the current minimum wage is not a “living wage”, i.e. compensation that can truly allow an individual to meet regular monthly expenses. Data provided by the panel indicated that a woman with two children would need to work three minimum wage jobs in order to place herself in a stable position in most communities across the country. Over two-thirds of those polled on the issue of the minimum wage regularly state they favor an increase, so political action on this front would probably not be overwhelmingly unpopular. Yet the question remains: are there other reasons for raising the minimum wage besides its effect on livings standards and its widespread support?

Perhaps the most important point discussed by the panelists was that the minimum wage can be raised without destroying jobs. Conventional wisdom long held that raising the minimum wage would cause this effect, but recent economic research has tended to disprove this theory. Whether a minimum wage increase is studied at the national level or within a smaller unit (like an individual industry), these recent studies have shown that a minimum wage increase actually has no effect on the number of jobs in the marketplace.

A minimum wage increase would actually be economically beneficial since it would increase the spending power of consumers, which would result in increased aggregate demand. Furthermore, a higher minimum wage would strengthen job stability, decrease job turnover, and benefit the middle class. Job stability and decreased turnover are benefits that would be shared with employers, since they normally must expend additional company resources to train new hires when individuals rapidly cycle in and out of jobs. With less job turnover, employees can also become more experienced.

An increase in the minimum wage could also directly stimulate the economy, and be part of a larger national economic recovery. In a sense, a minimum wage increase involves shifting profits from corporations to workers, since without an increase in pay corporations would normally keep these funds. Research indicates that although allowing companies to keep this money would benefit the economy, the profits can do more economic good when they are transferred to the minimum wage workers. This is because corporations often don’t go out and spend this extra money in the marketplace. Minimum wage workers, however, need to spend what they earn in order to obtain basic necessities. So the extra money put in the pockets of minimum wage workers is actually immediately spent obtaining goods and services.

Finally, a minimum wage increase could be used in conjunction with the Earned Income Tax Credit to provide even greater support for the working class. Using only the EITC in isolation with no minimum wage increase might actually result in a decrease in wages: the EITC encourages individuals to seek employment, but with an increase in the amount of labor available, wages go down. Using both the EITC and a minimum wage increase together would actually increase the positive effects of both. This two-pronged approach also has the benefit of dividing the financial burden of paying for this support: with a minimum wage increase, the employers must face additional costs, and taxpayers cover the EITC. Using both methods results in a more equitable distribution of who pays for the assistance.

The Center for American Progress’s panel raised many interesting questions, and the research cited indicates that the minimum wage need not be seen as an economic burden, but a tool for national growth. With bipartisan support for an increase in the minimum wage already in place, perhaps federal and state governments will take action soon on this important issue.

About the Author: Andrew Laine is a law student and intern at Workplace Fairness.

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Madeline Messa

Madeline Messa is a 3L at Syracuse University College of Law. She graduated from Penn State with a degree in journalism. With her legal research and writing for Workplace Fairness, she strives to equip people with the information they need to be their own best advocate.