Screw the Theory! Raise the Minimum Wage!

Opponents to minimum wage increases tend to rely on a familiar trope. Citing classical economic theory, they claim with full certainty that any increase to the minimum wage will immediately lead to unemployment and hurt the working poor. I'll let the National Federation of Independent Businesses* fill in the details, 

NFIB opposes any increase in the current federal minimum wage. Mandatory wage increases hurt not only small businesses, but their employees as well. Big corporations do not have to absorb the cost because most minimum-wage jobs are offered by small businesses. It has not been proven to reduce poverty or narrow the income gap and puts a stranglehold on America's top job creators: small businesses. The overwhelming majority of economists continue to affirm the job-killing nature of mandatory wage increases: mandatory minimum-wage increases end up reducing employment levels for those people with the lowest skills.

I'm going to leave the whole myth of small business aside for now, even though it's a badly overused political trope. Regardless, the NFIB is far from the be all and end all of this debate. There's plenty of small business associations that favor a minimum wage increase, and small businesses are not America's primary employer of low wage workers. Despite the fact that more than half of Americans work in firms with less than 500 employees, about 2/3 of the 1.5 million minimum wagers work in massive corporations. Since smaller employers are often looking for longer relationships and higher productivity from their employees, a lot of small businesses owners highlight the fact that they pay much better wages than their bigger competitors. A minimum wage increase would push this trend further.

Believe it or not, a minimum wage increase has shown to have stimulative effects as well. While increasing wages will increase costs, they'll also bring in more revenues. A lot of these community businesses, and especially those that have to really worry about labor, serve people who are at the bottom of the income scale. The benefit of increasing the disposable income of their customers more than outweighs the additional costs.

The bigger concern in the economic theory is usually employment, as higher wages make the marginal cost of adding another worker higher. But empirical evidence seems to point the other direction. The increase in spending brought on by higher wages encourages many businesses to hire more, and economists have proven that there is almost no negative employment effect due to minimum wage increases. This is one of the chief reasons that Bloomberg, of all publications, strongly supports a much higher minimum wage.

Last but not least, the minimum wage is an important tool for addressing inequality. Economists at MIT have pointed out that at least a third of the inequality gap that emerged over the last three decades can be attributed to an erosion of the minimum wage. This could be a part of the story why states with higher minimum wages had higher rates of growth, since, as the IMF points out, increasing inequality dampens growth.

Scare tactics come up a lot in our political debate. Just look at all the nonsense surrounding the estate tax debate. But this is another instance where these threats ring hollow. Despite loud claims to the contrary, higher minimum wages spur spending, don't decrease hiring and provide a base for stable, long-term growth. Every day that we let go by without a permanent, inflation-indexed minimum wage correction is a day where we sacrifice public good for the interest of a select few. We can do better.

*NFIB is a great example of modern-day newspeak. While they claim to represent small businesses, and they are often brought up in shallow news pieces in this role, they are, in fact, a highly partisan policy group. While they were part of the US Chamber of Commerce for awhile, they branched off because the Chamber wasn't conservative enough. In other words, they are the perfect gasbag for this blog to argue with.