More money fewer problems

Nick Hanauer wrote an interesting article in Bloomberg today making the case for a substantial bump in the minimum wage to $15 an hour. Basically, Hanauer argues for this on the basis of the marginal propensity to consume for workers earning minimum wage.

My investment portfolio includes Pacific Coast Feather Co., one of the largest U.S. manufacturers of bed pillows. Like many other manufacturers, pillow-makers are struggling because of weak demand. The problem comes down to this: My annual earnings equal about 1,000 times the U.S. median wage, but I don’t consume 1,000 times more pillows than the average American. Even the richest among us only need one or two to rest their heads at night…Raising the minimum wage to $15 an hour would inject about $450 billion into the economy each year. That would give more purchasing power to millions of poor and lower-middle-class Americans, and would stimulate buying, production and hiring.

As I was reading Hanauer’s piece, I could hear the counter-arguments in my head: raising the minimum wage will hurt employment (labor costs increase), it is an unnecessary government intervention, and it might be inflationary (as services-based businesses pass on added costs to consumers).

Felix Salmon addresses the potential inflationary impact of the minimum wage rise as a positive:

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.

Additionally, the Hanauer responds that the evidence linking minimum wage raises to decreases in unemployment is highly disputed, and Hanauer also argues that increasing the minimum wage will decrease government intervention in the economy:

According to the Congressional Budget Office, the federal government spent $316 billion on programs designed to help the poor in 2012…That means the current $7.25 minimum wage forces taxpayers to subsidize Wal-Mart Stores Inc. (WMT) and other large employers, effectively socializing their labor costs. This is great for Wal-Mart and its shareholders, but terrible for America. It is both unjust and inefficient…A higher minimum wage would also make low-income families less dependent on government programs: The CBO report shows that the federal government gives about $8,800 in annual assistance to the lowest-income households but only $4,000 to households earning $35,500, which would be about the level of earnings of a worker making $15 an hour.

Clearly, this issue is highly divisive and there is a lot of (disputed) evidence thrown around by both sides. My feelings on a permanent increase in the minimum wage are mixed: I think it would be beneficial in the current macroeconomic environment (elevated unemployment, weak demand, high corporate profits), but could become more of a burden once the economy is at full employment. A lot of how you feel about a minimum wage hike probably depends on where you stand with regard to the causes of the current economic slump. If you think the problems are structural (supply-side based), then raising the minimum wage is probably not for you. I think the evidence is overwhelming that our current slump is demand based—I’ve talked about this in the past. If unemployment is demand-based, then employers are failing to hire workers not because the labor is too expensive, but because there is no demand for their products. Lowering the minimum wage to $0 wouldn’t significantly help this problem, because the business has no need to hire new employees because no one is buying their product.

In this sense, raising the minimum wage would actually be beneficial on multiple fronts. First, it would reduce government expenditures in the form of assistance to the needy. Second, increasing the purchasing power of the working poor would have multiplier effects throughout the economy, increasing demand for services and other products (potentially having positive employment effects in the economy)–even better, this stimulus would be funded by the private sector (not the government), and it would come partially from a decrease in corporate profits (not the worst thing in the world) and partially from broader inflation in services-based industries (which would help lower real interest rates, spurring even more spending). Overall, this looks like a positive intervention for our current environment.

Where I worry about this is when we get back to full employment. A permanent increase in the minimum wage will make our labor markets marginally less flexible and make labor marginally more costly, which could lower the ‘full employment’ potential of the US economy (after which rising employment leads to inflationary spirals). I wonder if a temporary increase in the minimum wage might be a better policy option?


One thought on “More money fewer problems

  1. Pingback: The nature of Unemployment | lil stevie's econ blog

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