Would Increasing the Minimum Wage Create Jobs?

A few liberals say so. But even if they're right, the effect would be small and short-lived. 


The standard argument against raising the minimum wage is that it kills jobs by making workers more expensive to hire. Whether or not that's true has been the subject of a century-long economics debate that probably won't be resolved any time soon. But lately, some liberals have been attempting to flip the old criticism on its head. Higher minimum wages, they say, don't destroy jobs. Higher minimum wages create jobs!

This week, for instance, the Economic Policy Institute released a report estimating that raising the federal minimum wage to $10.10 an hour, up from $7.25 today, would add an additional 85,000 jobs to the economy, a finding that's been covered in liberal-leaning outlets like The Huffington Post.

It's not an entirely crazy notion. But it's also less exciting than you might think.

When economists study the minimum wage, they generally find that it either creates a small number of job losses, or leaves employment untouched. But once in a blue moon, their math does suggest a link between a higher-wage floor and job creation.

Why might that be? There are a few potential explanations. But the one we care about today frames the minimum wage as a kind of economic stimulus. The key is that poor and middle class families tend to spend more of their income than the wealthy, since they're often struggling to meet basic needs. So by taking money from businesses and giving it to their worst paid employees, raising the minimum wage might, in theory, increase consumer spending—which in turn boosts the economy and creates jobs.

Let's translate that into the real world for a moment. If you give a McDonald's franchise owner an extra dollar, they might save it. But if you give a McDonald's cashier an extra dollar, they're almost certainly going to spend it quickly, like the next time they go to buy groceries. Since the U.S. is fueled by consumer spending, we're all better off it that money gets used to purchase some milk and eggs than if it gets stuffed in a bank account.

Of course, things aren't quite that simple (are they ever?). When wages go up, some businesses raise their prices, which leaves their customers with less to spend elsewhere. So, to some degree, hiking the minimum wage just shuffles money between two different sets of consumers.

Still, some economists believe that when it all is said and done, upping the minimum gives the economy a quick pop. According to the EPI's math, raising it to $10.10 an hour should increase wages by $35 billion and boost economic activity by $22 billion—which by their account is enough to create those 85,000 jobs. If you assume some teenagers and adults will be laid off when the wage floor rises, then the job gains shrink.

The thing to remember, though, is that even if the minimum-wage-as-stimulus theory is correct, its impact is probably fleeting. In August, Federal Reserve Bank of Chicago economists Daniel Aaronson and Eric French produced their own estimate of what would happen if the minimum wage was raised to $10. Even if you factored in price increases and job losses, they found the increase would add $28 billion in spending to the economy. But after about a year, they predict the effect would dissipate.

Why? Part of the answer: debt. One reason increasing the minimum wage would plump up spending so much, they find, is that it would give workers the ability to put down payments on big-ticket items like cars. Later on, their spending would fall as they begin making loan payments.

"Thus," the researchers conclude, "a minimum wage hike provides stimulus for a year or so, but serves as a drag on the economy beyond that."

I wouldn't call it a bad deal—working class families should be able afford cars, after all—but it's not exactly a stimulus plan to write home about.