Why Raising the Minimum Wage Is Good for the Economy*

mcdonalds-budget

With the proposed minimum wage bill gaining some press as well as the laughable sample budget that McDonald’s has produced and has now come under fire for, minimum wage debates have begun to take place in the country once again. While some believe that minimum wage should be increased because it has not kept up with inflation, others believe that an increase would only hurt workers by making lay-offs and job shortages a harsh reality. While there is no real way of knowing how an increase in minimum wage will affect the economy until it is in place, with some careful analysis of the current economic climate and spending habits of the minimum wage earners, a clearer picture of a solution to this issue can be painted.

Being an economist/social scientist means predicting human behavior. This often proves difficult because humans are not very predictable. So while economists say that based on the law of demand and past behavior an increase in wages will not lead to an increase in spending, it is merely an educated guess. Therefore, those who argue against raising minimum wage have claimed that in the past raising the minimum wage has not boosted the economy, and are correct; however, their current predictions are rooted in past attitudes and behavior which does not necessarily reflect the present climate. I believe that a better way of predicting human behavior is to not look at the past, but rather the current attitudes

With that being said, here is my prediction based on what I have found to be true (or at least mostly true) about today’s workforce. I predict that an increase in minimum wage, given the current economic climate, will lead to an increase in spending. I believe there are two assumptions that are being made by economists about the workforce today that do not seem pertinent to the times. One of these assumptions is that raising the minimum wage will only hurt millennials because it will make unemployment rise. This may be the case to a small degree, but I believe that while a rise in minimum wage would lead to a temporary dip in employment at first, when these workers begin to earn more, they would begin to spend more and thus create more jobs. It will also free up jobs as these workers will no longer need to work multiple jobs in order to get by.

The second unsubstantiated claim about the current minimum wage workforce is that an increase in pay will not mean an increase in spending. While this has been true in the past, I believe that today the cultural climate is right for spending tendencies to be affected by an increase in wage. So what makes the cultural climate different? The main difference is generational. In the past, other young employees (i.e. when the Baby Boomers were young) were more likely to save extra money while the youth today are more focused on spending and material gain. Seemingly every week there is a new report out dedicated to millennials and their materialistic tendencies (usually cast in a bad light.) Many of these reports neglect to mention, however, that although these materialistic tendencies may not be completely commendable, they certainly can help the economy.

So what would more money in the hands of the younger generation look like? In 2012 there were 284,000 college graduates working minimum wage jobs. If their wages were to increase by $3/hour, given the materialistic tendencies of these workers, that would mean an increase of purchasing power of $120 per week (although this does not factor in taxes). Then if that number is multiplied by the number of millennial-grads in these jobs that would generate approximately $35 million more revenue every week. Even if these workers only spent $1/hour more of their wage increase, they would still spend $11 million a week. Furthermore, these figures don’t even take into account those millennials who are working minimum wage jobs and don’t have a college degree, although it does assume those who have college degrees are working 40 hour work weeks.

The industrial revolution happened at a time when the exploitation of workers became too extreme. Young children worked in factories, people lost limbs on the job, and many developed health issues such as respiratory problems as a result of a lack of concern for the workers. While the physical safety of the workers is protected today, a lack of concern for the financial safety of those workers is a harsh reality. We need a new industrial revolution -a service industry revolution. Today we need to reevaluate the economic structure of this country in order to help it grow and protect the workers at the bottom. Economic inequality as staggering as that which exists in the US today will only make the country weaker and less stable. An increase in minimum wage will lead not only to a more stable social and economic climate, but could also lead to economic growth and potentially an end to one of the greatest recessions our country has witnessed.

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*I wouldn’t be a good journalist if I didn’t admit to having a bias with regard to this subject. I am a millennial who has a minimum wage job. While this makes me partial to an increase in wages for my own benefit, I believe it also makes me more qualified to speak on the subject than a successful “boomer” because I am living this reality.

For more on this debate and to see the articles I researched in this process check out the following links:

http://washingtonexaminer.com/op-ed-raising-minimum-wage-will-kill-jobs-for-young-millennials/article/2529084

http://www.huffingtonpost.com/2012/05/01/millennials-cost-basic-needs_n_1468938.html

http://ourfuture.org/20130405/the-sinking-american-electorate-young-and-in-peril

http://www.thefiscaltimes.com/Articles/2012/05/15/Millennials-Young-Broke-and-Spending-on-Luxury#page1

http://www.thefiscaltimes.com/Articles/2012/05/10/How-Millennials-Are-Saving-the-Economy#page1

http://www.pewsocialtrends.org/2012/02/09/young-underemployed-and-optimistic/

http://www.forbes.com/sites/jamesdorn/2013/07/22/the-minimum-wage-is-cruelest-to-those-who-cant-find-a-job/

http://www.raisetheminimumwage.com/facts/entry/amount-with-inflation/

http://www.marketwatch.com/story/mcdonalds-ceo-try-living-on-mcbudget-of-25000-2013-07-25

http://blog.acton.org/archives/58278-appreciating-mcdonalds-beyond-minimum-mindedness.html

http://money.usnews.com/money/blogs/my-money/2013/02/05/low-skill-jobs-with-the-highest-concentration-of-college-graduates

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4 thoughts on “Why Raising the Minimum Wage Is Good for the Economy*

  1. While there is no real way of knowing how an increase in minimum wage will affect the economy until it is in place…

    The minimum wage goes against the Law of Demand not the Law of Predicted Cultural Attitudes. If a small business owner can afford to pay $15 in wages to two employees and minimum wage is raised to $20 that small business owner is either going to lay off an employee or wait longer before hiring anyone else.

    Comparing the minimum wage to on the job safely regulations is a complete non sequitur.

    Economic inequality is good a good sign that the standard living is increasing. There will always be poorer people. So it’s logical that the gap between the rich and the poor is increasing. It’s been increasing forever. The best measure of how well society is doing economically is by judging living standards. Even the poorest Americans have a much higher standard of living than the poorest Americans 20 years ago.

    I also had a minimum wage job when I was in college. I was happy to have it and the experience I got from the helped me climb the ladder. If the minimum wage was higher it’s very likely I wouldn’t have been hired.

    2+2 will always equal 4. It doesn’t matter what the culture thinks.

    • First of all, thanks for the comment! I was hoping to have some healthy debate on here!

      The law of demand, in my opinion, should not actually be considered a “law” (nor should much in the field of economics) because the field of economics assumes too much to be true that may or may not actually be true. Take the law of demand for example, the following is held constant (or “assumed”) for simplification purposes: prices remain constant, number of buyers remain constant, fashions and tastes remain constant,
      etc. All these examples, in the real world, play an enormous role in what goods are demanded and what are not. Therefore, I am arguing that the law of demand may actually be affected by factors that occur in the real world, but may be dismissed or “assumed” by economists.

      Also, a small business owner has more options than the two that you gave here. They can cut heating and cooling costs, reduce waste, raise prices (which may be a good idea if they, like the minimum wage, have not been adjusted for inflation), and I’m sure there are many other creative solutions here that I just can’t think of currently.

      Yes, standard of living is increasing, which means cost of living is increasing, which means the current wages must also increase to keep up with these demands. You’re right that there will always be a gap between rich and poor, but the current gap has gone too far. Here are two videos that are very informative and support my belief about economic inequality today: http://www.youtube.com/watch?v=QPKKQnijnsM

      The latter video, I’m aware, is a bit of a different argument than what I wrote in this post. Basically what I would like to highlight in this video is what he says about economic inequality and how if the median household income had kept pace with economic growth, these families would be earning more than $40,000 more. The same can be said for minimum wage earners. If their income had kept up with the price of inflation, imagine how much our economy would be affected. The current distribution of wealth makes the bottom 15% of Americans, or 47,087,106 people almost non-factors in the economy. How does that help the economy grow?

      I’m not lamenting about having a minimum wage job, I’m lamenting that there are full-time workers today that still can’t afford to support themselves. On a personal level, I am a runner but I have found that I am no longer able to do this activity that I love because I cannot afford to feed myself the volume of food that lifestyle requires on a minimum wage budget. Many minimum wage earners are also find themselves unable to pay for car insurance, rent (and all that come with it), phone bills, loans, gas, health insurance, etc because of their income in relation to the cost of living. I am thankful for my job, but I am fully aware that it does not provide a sustainable income.

      Finally, economics is not as dependable as physics, in that when something goes up it doesn’t necessarily mean something else will need to come down. Economics is a social science and thus much more difficult to place in a nice, neat little box or to sum up in one simple equation.

      • The minimum wage isn’t an unproven theory. There’s a well documented past which I urge you to study. Also, you should research “household income.” Household income is a poor measure of income distribution because households are a lot different in 2013 than they were in 1980 or 1950.

        Thomas Sowell’s Economic Facts and Fallacies does a wonderful job of covering income distribution and the problems with measuring household income and it’s written in a way that non-economists can understand it.

        I agree with your assertion about Economics as a science because it’s been pretty much bastardized over the last 20 years by partisan politics; however, the minimum wage is Economics 101 material. It’s a bad policy that should have been abolished a long time ago.

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