Does Raising the Minimum Wage Really Benefit the Economy?

Whenever D.C. needs a distraction, they turn to one of two scapegoats: equal rights or the minimum wage. As of April 2021, it’s the latter.

While each one is an important topic on its own, partisan stigma spins them so far into rhetorical solipsism that facts become an afterthought. So *cracks beer* it’s time to take a deep dive into whether or not raising the minimum wage is a good idea. 

All the money you don't have

Stating What’s What in Plain Terms

Does raising the minimum wage help the economy?

Since “helping the economy” means a million things, let's clarify. An ideal economy gives each person the best chance of reaching the “American Dream.” While the American Dream is a myth, its ideology has been internalized by my generation and those before me.

As I understand it, successful economies let people earn money, have kids, buy a house, and retire. Work hard, die rich. Shed debt, accrue wealth. 

Yes, it's an overgeneralization, but we gotta start somewhere, and since it’s easier to field objections than make a case for raising the minimum wage, I'll start there.

Argument 1: Raising the Minimum Wage Hurts Employment

By far, the most popular argument against raising the minimum wage is that it will hurt small businesses. Small, locally owned shops that spend within their means for a modest yearly revenue will be forced to shut down over rising employment costs. 

While there's little evidence to show that minimum wage hikes hurt employment, it’s easy to see why the idea persists.

In 1992, Alan Krueger and David Card studied wage hikes in fast food restaurants such as Burger King, KFC, Wendy’s, and others.

They found that restaurants that increased minimum wages were able to hire on 2.5 more employees over the next year, roughly the same rate as restaurants without the increase. Of the 410 stores studied, all but 6 remained in business—a success rate of over 98%.

“Yeah but those costs were passed onto customers, right?” Nope. There were no significant differences in consumer food costs. Raising wages resulted in none of the drastic ripples one might expect.

In 2013, John Schmitt wrote about how wage increases only negatively affect teenage unemployment, and by small margins. Citing a meta-study by Doucouliagos and Stanley that analyzed 64 minimum wage studies—both for and against raising the minimum wage—Schmitt writes that nearly all results “clustered at or near zero employment effects.”

Many studies report employment losses of 1% or less, but the facts simply don’t show that raising minimum wage cripples employment—at least not anywhere near what the hysteria suggests. 

Argument 2: The Minimum Wage Was Never Meant to Support a Family

from the Economic Policy Institute

Others argue that the minimum wage is only meant for unskilled laborers. As 2002’s immortal The Hot Chick puts it, “minimum wage for a maximum loser.”

Not only is this take divisive—it's not true. When the $0.25/hr minimum wage became federal law in 1938, its buying power was much, much higher. The housing market was stable, college was more affordable (FAFSA wasn’t even around until 1992), and inflation rates were in the negative.

Even though $0.25 translates to a mere $4.70 today, the median home price in 1938 was $4,000—8 years of earnings at minimum wage. Compare that with today's median home price of nearly $300,000—20 years of full-time minimum wage earnings ($14,500 annually).

Whether or not the minimum wage was meant to support a family, doing so requires over twice the work today. That strikes me as a problem.

The minimum wage was raised in 1939, then 1945, then 1950, and roughly every 5-10 years to keep America’s main workforce funded. It seems to have stopped now, with the last federal minimum wage raise in 2009. 

Argument 3: Just Get a College Degree Then

Today’s minimum wage jobs are competitive, and graduating to better paying ones is harder and harder. Thankfully, education offers a ticket out of poverty—at least that's what we're told throughout high school. 

With a college degree, you'll find a good job and earn more. Bite the bullet, take out the student loan, work hard, and graduate. It'll be worth it.

The problem is that  as tuition costs rise, wages don't.

In 1934, a year at Dartmouth—the most expensive college in the country—cost $1,700 a year, equivalent to about $30,000 today. As of 2020, it costs over $60,000 a year to attend Columbia University.

Due to constant waves of unemployment (which will likely intensify), the supply and demand employment model puts us in an employer’s market. Overqualified workers can’t find work after college, and now there's debt to repay. 

In this absolutely incredible read, Michael Hobbes cites this statistic:

“In 2007, more than 50 percent of college graduates had a job offer lined up. For the class of 2009, fewer than 20 percent of them did. According to a 2010 study, every 1 percent uptick in the unemployment rate the year you graduate college means a 6 to 8 percent drop in your starting salary.”

Minimum wage isn’t going up, and skilled workers face an ever shrinking pool of sucky job prospects.

Argument 4: States Should Determine Minimum Wage

Some don't mind raising the minimum wage—they just think the federal government shouldn't do it. While the idea seems harmless, its proponents ignore a big history lesson.

One hallmark of classical, Friedman-style economics is that each person does what best serves their own interests. If they aren’t made to change, they won’t, and it’s easy to see this in practice.

Businesses seek greater market share, corporations increase shareholder value at almost any cost, and it’s always—always—the employees who get left behind. Since 1978, CEO pay has risen by nearly 1000%. For workers, that number is only 12%.

Leaving it up to the states isn’t the answer. The states’ rights argument has been used to impede everything from slavery and civil rights to taxing capital gains and extraditing sex traffickers. Why? Because it merely transfers power rather than checking it, leaving power in the hands of the powerful. 

Numerous states today have minimum wages lower than federal rates. Without a mandate to pay more to workers, it's hard to imagine these states doing it on their own. 

At best, governments should encourage, if not enforce those in power to support people who put them there in the first place. After all, the free market doesn't work unless both sellers and buyers participate.

So, Does Increasing the Minimum Wage Actually Help?

I confess that it’s a lot easier to parry critics of a minimum wage raise than it is to make a case for it. Raising the minimum wage may not hurt the economy like some suggest, but will it actually help? That’s a whole ‘nother matter.

The short answer is this: increasing the minimum wage is good for the economy, but only when done within reason. Why does this suck? Because while we are long overdue for a raise, that gap has grown so much that catching up could have consequences.

An increase of 10% in wages, according to David Neumark, results in a 1% decrease in teen employment. Increasing the minimum wage will probably lead to some job loss, but this is where I think it’s important to ask what that really means.

Think about it—the minimum wage was first implemented when nearly two million children were employed in sweatshops, and child labor laws limiting their workdays to 10 hours were ignored by their employers.

We can all agree this was bad, right? More employment isn’t better when it doesn’t result in dignified work for those employees. But, like this video says, asking a few businesses to sacrifice for the many is like switching the train in order to save some lives. No one wants to make the call.

Unfortunately, we’re at a difficult crossroads. Making a decision like this has to be worth it, so is it? 

We need friggin' food!

Why Giving People More Money Is Good

The stimulus checks of 2020 made one thing clear: lower income spending supports local economies. While the rich often spend their money in risky financial speculation (which can destabilize economies), average households put their money back into the economy and help it grow.

Decades ago, the solution was trickle down economics—a plan to relieve tax burdens on the wealthy so they can build bigger enterprises, pay more employees, and spread the wealth around. There's a problem though: the wealthy don’t circulate their money back into the economy. Instead, they shield it to produce wealth for their families, preventing the inequality gap from closing.

This is why giving money directly to workers helps the economy. 

People like Andrew Yang have suggested other ways to do this. A universal basic income (UBI), Yang and others argue, would help people regain financial independence, take control of their lives, and feel free to spend more money, thereby strengthening the economy. 

Could it work? Yes. In fact, it already has.

In 1933, The New Deal did this by raising wages, capping financial speculation, and implementing what many would call “Socialist” programs in an effort to resuscitate the U.S. economy from the Great Depression. It stands as the American experiment for when government-mandated programs worked.

While there’s debate about how to give people more money, be it through work or stimulus, it’s hard to argue the merits of increasing the incomes of lower and middle classes.

Doing What the People Want

Whatever your thoughts on the matter, raising the minimum wage is a popular idea in the U.S., with two thirds of Americans in favor—both Democrat and Republican.

That our representatives still haven’t raised the minimum wage indicates their allegiance to corporate money, rather than us, their constituents. 

Worried about your tax dollars going to unskilled workers? Good news! They already do. As wealth inequality spirals out of control, companies like Amazon and Wal-Mart cut wage costs by letting us taxpayers supplement their subpar wages.

Their stock prices keep going up, and if we don't require them to pay their workers living wages, our tax dollars will just do it for them.

In Closing

Changes like this can and will have unintended consequences. It's unnerving, but it's the only way to support and protect the low and middle classes. 

Urban centers keep growing, rent keeps rising, and life gets more and more expensive. It's time for wages to keep up.

It’s time to increase the minimum wage.