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

Hint of What’s to Come: A Look at Poverty and Economic Inequality

Map of the UN’s human development index report. The darker the blue, the more developed the country. Image found at: http://en.wikipedia.org/wiki/File:2011_UN_Human_Development_Report_Quartiles.svg

I am currently working on a large project (a prezi, to be exact) on poverty and economic inequality. (Yes, this is what I do for fun.) I will be posting it when I have finished it, but until then, I will give a teaser (or two).

When researching poverty facts I came across this quote that I found to be quite poignant and combines a lot of different ideas that I am learning in my post-grad study of economics, work, human development, etc.

“Human development is about much more than the rise or fall of national incomes. It is about creating an environment in which people can develop their full potential and lead productive, creative lives in accord with their needs and interests. People are the real wealth of nations. Development is thus about expanding the choices people have to lead lives that they value. And it is thus about much more than economic growth, which is only a means—if a very important one—of enlarging people’s choices.” —Human Development Reports, United Nations Development Program (found here: http://www.globalissues.org/article/4/poverty-around-the-world)

By this definition it can be argued that even some countries traditionally seen as developed are actually under-developed. Take the US for example. Has the country really done what the second sentence of the quote says? With underemployment near 20% and people holding on to their jobs regardless of whether is matches their skill-set, interests, and needs, the answer is no. People in the US are not reaching their full potential in the working world.

Meanwhile, economic disparity is at an all-time high and the richest 1% of the population is still getting richer. This is contrary to means of development, however, and economic inequality that high is actually something that is found in many developing countries. In fact, according to an NPR article, the US’s economic inequality rivals that of the Sub-Saharan African countries of Cameroon and the Ivory Coast. These countries according to the 2011 UN Human Development index rank 150th and 170th respectively on the development scale. This raises an important set of questions: is it possible for a country to move backward on this scale and is that the future for the US? With all the talk of “racing to the bottom” that is creeping up in economic conversations, it is getting harder to answer those questions with a “no.”

International Human Development Indicators – UNDP.