Matt Kaye

Is a Wage Hike the Answer to our Economic Woes

Both sides of the aisle have proposed several plans over the past eight years to combat the economic stagnation that has followed the Recession. None have worked so far, with GDP growth at 1.4% – down more than 50% from the average of 3.22% growth over the last seventy years – and labor force participation sitting slightly below 63% – down significantly from the pre-recession 66%. Additionally, historically low interest rates have kept the Federal Reserve in a bind for almost a decade, rendering monetary policy useless. Overall, conventional economic policy has not worked. However, many of the economic issues that we face today could be the result of low consumer spending, an increase in which would boost inflation, help cycle money through the economy, and spark a period of growth: the ultimate goal for all parties

The conservative argument against a minimum wage hike centers on the labor supply theory that an increase in the minimum wage would lead to a decrease in the quantity of labor demanded by firms and therefore a decrease in employment. As Jeffrey Wenger, a senior policy researcher for the RAND Corporation, put it, this theory is irrelevant because comparing labor to static inputs (such as steel) is impossible. He says that “raising the price of steel does not fundamentally change what steel is,” and then argues that changing wages, however, alters a worker’s productivity, loyalty, morale, and motivation. Research and tests in both corporations and cities tend to support this research.

Wage increase experiments and research have been happening all over the country and are especially common on the West Coast. Seattle’s minimum wage currently sits at $10.74: the highest of any major city in the United States. The city has been raising its minimum wage constantly for years, and, according to studies by the University of California at Berkeley, the effects on employment have been negligible. Michael Reich, an economics professor at Berkeley, suggests that there would continue to be no impact upon employment for minimum wages as high as $13, which matches what RAND’s research found. Berkeley researchers expect similar results for wage hikes towards a $15 minimum in San Jose and New York State, showing some consensus nationwide. Similar trends emerged in each study and experiment: wage increases led to more productive and motivated workers.

The Upshot (NY Times’s Version of FiveThirtyEight) just published an article investigating some of the causes of WalMart’s drops in both revenues and positive reviews, and detailed some of the outcomes to give readers a view of wage policy in action. WalMart – the biggest employer in the United States and a corporation notorious for cost-cutting – was losing money and had stores that looked disorganized and mismanaged. To combat their problems, they raised wages and offered more training to employees with a track to higher-paying jobs as a reward. As if by magic, WalMart’s stores became more organized, workers sought more training, and revenues increased. This experiment by America’s largest employer confirms what the research asserts: our country has much to gain in terms of morale and productivity from paying our workforce more.

How does the minimum wage tie into the economic stagnation that our nation has faced since the Recession? The connection is quite simple. While the effects on firms and the employment situation in the economy are important, incomes are paramount. The proposed wages could increase incomes by fifty percent or more for many workers, which has an enormous effect on both their individual qualities of life as well as the macroeconomy. With more disposable income, Americans would be able to afford more necessities and lift themselves from the grips of poverty. Access to health care, nutritious food, and education are all examples of the potential benefits to a worker’s quality of life, as the increased income would likely lead to increased spending on these goods and services, among others. Conventional economics would argue that as consumer spending increases, inflation and GDP growth increase with it — two of the metrics still lagging from the Recession –giving us a rare win-win situation.

Given today’s economic stagnation, a minimum wage hike is worth serious consideration by liberals and conservatives alike. Interest rates have been historically low for years and numerous stimulus packages have been enacted in attempts to restore economic growth to around two-to-three percent. Our unbelievably expansionary fiscal and monetary policy positions’ inability to stimulate the economy shows that conventional economics has not been working as predicted and that we should try a different approach. An increase in wages might be just the remedy that the economy is seeking, as it would improve labor productivity, incentivize workers to rejoin the workforce, and increase consumption spending, all of which would have net positive effects on the economy in both the short and long terms.

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