Raising the Minimum Wage Boosts Growth and Does Not Cause Unemployment

04/27/2015 08:23 pm ET | Updated Jun 27, 2015

Walmart and Target recently announced they would increase wages for their lowest paid employees to $9 per hour. McDonalds will start paying its workers $1 more per hour than the local minimum wage. Although these are welcome signs of businesses willing to boost worker incomes, which have been stagnant for decades, it is time to go further: we must significantly raise the minimum wage.

The Federal minimum wage of $7.25 per hour is far too low. A full-time worker -- 40 hours per week for 52 weeks -- earning the minimum wage is guaranteed to live at the poverty level. Raising the minimum wage is good economics, good policy, and good for workers. It would reduce income inequality and poverty while boosting growth, without increasing unemployment.

A higher minimum wage would also reduce the Federal budget deficit by lowering spending on public assistance programs and increasing tax revenue. Since firms are allowed to pay poverty-level wages to 3.6 million people -- 5 percent of the workforce -- these workers must rely on Federal income support programs. This means that taxpayers have been subsidizing businesses, whose profits have risen to record levels over the past 30 years.

Adjusted for inflation, the current minimum wage is at the same level as it was in 1956 and reached its maximum inflation-adjusted value in 1968, when it was worth $10.89 in today's dollars. Had the 1968 minimum wage grown at the same rate as the cost of living it would be $16 today. And if it grew in step with worker productivity, the minimum wage would be $22 today -- triple its current level. Yet while the value of the minimum wage has eroded by 67 percent, corporate profits have grown by over 300 percent.

The Fair Minimum Wage Act would raise the minimum wage to $10.10 over three years, and would boost living standards for over 25 million workers, and many more due to the ripple effect. All workers earning between the current minimum wage of $7.25 and $10.10 would get an immediate boost in their income. But, so too would workers earning just above the new minimum wage. And, to maintain internal pay scales, so would the workers just above them, and so on. The ripple effect can boost wages for low-income workers up to 25 percent more than the new minimum wage, providing a huge and sorely needed economic stimulus.

$10.10, however, is not enough to live a decent life. Full-time workers would still remain near the poverty level. What is needed is a living wage -- a wage that ensures full-time workers can support a family without government assistance. Although estimates vary by location, an hourly wage between $15 and $25 would be enough to live a decent life for a small family.

Many critics think that raising the minimum wage will hurt precisely those workers that this policy is designed to help because firms will lay off workers to save on labor costs. Raising the minimum wage, critics argue, will create more unemployment and more reliance on public assistance. But there is no evidence to support this claim: states with a minimum wage higher than the Federal minimum have experienced faster rates of job growth than other states. How is this possible?

When the minimum wage rises, it is usually phased in over time, giving firms time to adjust. As wages rise, firms become more productive and efficient because higher wages reduce turnover, absenteeism, and hiring and training costs. Each time a worker quits a fast-food job, where turnover rates are exceptionally high, it costs the employer $4,700 to replace them. Using the low estimate of a living wage, raising the minimum wage to $15 would save firms a total of $2.1 billion, allowing them to avoid layoffs and afford the higher costs.

Another reason higher minimum wages do not lead to increased unemployment is that firms can compensate for the higher labor costs by raising prices. A $15 minimum wage would cause firms who employ low-wage workers to raise prices by only three percent.

Instead of turning to layoffs, firms could also accept slightly lower profits in the short term and, instead of engaging in stock buybacks which enrich stockholders, share with their workforce in the fruits of this growth. But, over the longer term, as incomes rise, consumption will increase leading, ultimately, to higher profits.

As businesses experience greater demand and sales, they are likely to hire more workers over time. This would serve as a stimulus that could help workers, firms, and the economy as a whole.

Small firms would face a special set of challenges since they operate with thinner profit margins. With the additional tax revenue generated by higher incomes and increased growth, coupled with reduced spending on income support programs for low-wage workers, small businesses could be given tax credits to offset the cost of a higher minimum wage, enabling them to avoid layoffs.

By failing to ensure the minimum wage keeps pace with the cost of living and worker productivity, policymakers have created a situation where full-time workers earning the minimum wage have to rely on public assistance to make ends meet. Programs such as the Earned Income Tax Credit, Medicaid, Supplemental Nutrition Assistance, and Temporary Assistance to Needy Families cost taxpayers billions of dollars each year. Half of this spending goes to working people earning less than $10.10 per hour. Raising the minimum wage to this amount would lower welfare rolls by 1.7 million people and reduce government spending on welfare programs by $7.6 billion per year.

The minimum wage has been too low for too long. In an era when Wall Street bonuses are twice the amount earned by all minimum wage workers, it is clear that businesses can afford to boost the pay of their lowest paid workers. 140 cities have enacted living wage ordinances and 29 states and the District of Columbia have a minimum wage higher than the Federal minimum, and none of these economies have imploded. Raising the minimum wage is good economics and good policy. It is time that businesses start paying their fair share of wages so that taxpayers don't have pick up the slack.