Why Raising the Minimum Wage Makes Economic Sense

A minimum wage is a small minnow in an ocean of deficient aggregate demand

It was good to see President Obama calling on Congress to raise the federal minimum wage to $9 an hour from $7.25 and to automatically adjust it with inflation in last Tuesday’s State of the Union Address. Given today’s massive income inequalities, it was the bare minimum the President could ask for. As a new paper by Emmanuel Saez explains, the income gains to the top 1 percent from 2009 to 2011 were 121 percent of all income increases. How did that happen? As Naked Capitalism’s Yves Smith notes, it happened because incomes to the bottom 99 percent fell by 0.4 percent.

Seen in that context, the President’s proposal, aimed at increasing the earnings of millions of cooks, janitors, aides to the elderly and other low-wage workers is small beer, but still highly unlikely to make it through today’s plutocrat-dominated Congress. Even though federal income taxes are still marginally progressive, most Americans have had no significant after-inflation wage increases since the early 1970s. At the same time we’ve seen redistribution of income (and wealth) of biblical proportions toward the top. In recent years, toward the toppest of the top – the so-called 1 percenters.

At the current pace of redistribution, it won’t be long before we realize the dystopian vision of H.G. Wells’ The Time Machine, comprising a celestial dwelling Eloi, who live in elegant futuristic dwellings and do no work, and a cave-dwelling group of Morlocks, who live in darkness underground, operating the machinery and industry that makes the Eloi’s paradise possible.

Although many seek to justify this growing income inequality on the fact that the “1 percenters” are the entrepreneurs, the dynamic risk-takers, who create the employment for the rest of us, the truth is rather more prosaic. The real job creators are the bottom 90 percent, including those right at the bottom rung who would benefit from a minimum wage—consumers, those who spend nearly all of their income on real goods and services and hoard very little of it. And truth be told, without spending there are no sales; without sales there are no profits; without profits there is no demand for workers; without demand for workers there is no job creation; and without job creation there is no recovery!

A minimum wage is but a small minnow in an ocean of deficient aggregate demand – that fancy term economists use to describe society’s collective spending power. The response against the minimum wage invariably starts with the proposition that unemployment is a “supply side” problem and that raising the minimum wage somehow creates additional supply side barriers which impedes the ability of the one percenters to hire more workers. That allows them to define neat equilibrium solutions which lead them to tell our policy-makers in Congress that wage cuts and pernicious welfare-to-work remedies are required to cure mass unemployment.

This myth allows them to make the leap – if unemployment is a “supply side” problem then increasing the minimum wage will not help, especially given (so goes the story) that most of them are scroungers sucking at the teat of big government via food stamps and welfare. Yes, it is true that lower-income people receive food stamps and the like, but that’s because the legal minimum wage is far too low to feed a family even if the bread-winner works full time.

Just whose fault is that? Well, mostly conservatives who block minimum wage hikes. The fantasy is also extended to suggest that a modest provision of unemployment benefits allegedly increases the attractiveness of leisure, which allows these “scroungers” to relax on the beach, or sit on their couches drinking beer and watching TV all day courtesy of the hard-working people at the top.

The truth is far more prosaic. Most people would love to escape from the underclass of wages that currently fails to offer people a living wage, and leaves these people struggling to avoid unemployment, loss of community, and a collapse in self-esteem.

When the wealthiest of our society screw up royally — for example, by causing a global financial crisis — we think nothing of spending trillions of dollars to safeguard their privileges and standard of living. By contrast, we have done next to nothing for ordinary, hard-working people for decades, essentially leaving the minimum wage unchained, or unattached to increases in the cost of living.

Interestingly, if the supply side fantasists were correct, leaving minimum wage low is supposed to bring on a splurge of additional hiring by allowing employers to get away with slave wages. But, reality doesn’t work that way. What happens in the real world is that low-wage workers go down to the shops and see that everything is more expensive. They are worse off than before, because the real wage has fallen, and therefore they consume less, which adds to our deficient demand problem. The economy gets worse.

Advised by a class of professional economists who are trained to explain why this is the best of all possible worlds as long as the corporations can do whatever they want, no CEO will think to do what Henry Ford did when he introduced the $5 day for workers. As Jon Rynn has noted, Ford justified his largesse by pointing out that his workers could now afford to buy his cars. Although a marginal minimum-wage increase will certainly not open up the floodgates for more automobile sales, it would inject marginally more spending power into an economy that still needs to create millions of new jobs to get us back to full employment. In that sense, the President’s proposal should be viewed as the barest of minimums for the most marginalized of our society.

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