Minimum wage

In the State of the Union on Tuesday, the President called for an increase in the minimum wage, to $9.00 an hour.  From conservatives, this was more proof of the President’s anti-business stance, especially his antipathy (or at least indifference) towards small business.

First of all, I know it’s hard to start and run a small business.  I know entrepreneurship is difficult.  John Maynard Keynes loved entrepreneurs.  He had a phrase, ‘animal spirits,’ which I frankly don’t think works all that well–the phrase, I mean, which seems rhetorically careless–but which he used to try to capture that rare mix of courage, foolishness, gumption, fearlessness and go-for-broke toughness that defines what it takes to pursue an idea, follow a dream, built something that might last.  But Obamacare does increase the costs of running a small business.  Regulatory requirements often require hiring one staffer just to handle the paperwork.  Now, you have to pay people more.  I get it.  The ‘Obama’s against us’ meme doesn’t come out of nowhere. (And I would completely support identifying specific paperwork that could be reduced.)

So, in a high unemployment environment, does it make sense to raise the minimum wage?  Wouldn’t this just provide a disincentive for employees to hire people?  Won’t it result in layoffs?  Won’t workers see their hours cut?

There have been many studies of the effect of raising the minimum wage, however, which have generally come to surprising conclusions.  This one, by David Card and Alan Krueger, is typical. Raising the minimum wage does not increase unemployment.  It may seem counter-intuitive, but raising the minimum wage is actually good for small business.

Keynes predicted this result.  Think about a family of four trying to live on the minimum wage. The minimum wage is $7.25 an hour–40 hours a week, 52 weeks leaves a base pay of $15,000, more or less; around 13, 000 after taxes.  It’s real hard to live on thirteen grand a year; both parents have to work, and it’s a tough life.  Most families in that situation have significant credit card debt, or worse, paycheck loan debt.  Sometimes we think that credit card debt consists of consumer spending–we tend to look down our noses at it.  Not so–research shows that most credit card debt is for large unexpected expenses–a car repair, broken appliances, unexpected medical expenses.

So what does that family do if they get an extra $1.75 an hour?  They’re going to spend it.  They may pay down some debt initially, but they’re going to spend it–food, gas, some basic needs.

So they have more money to spend, and they will spend it, and what does that do economically?  More money circulates, business profits increase.  It’s what Keynes called a multiplier.  If you say to a small business owner, ‘you have to pay everyone a buck and a quarter more,’ he’s not going to like it initially.  But that’s not what you’re saying.  You’re saying, ‘you have to pay everyone more. And the result will be ten percent higher business volumes.’  That’s a positive trade-off for the owner.

You may say that that’s pie-in-the-sky reasoning, but it’s not.  That’s what the data show actually happens.

This is why a federal stimulus works.  President Obama talked about all those bridges that are about to fall down?  If we fix ’em, the guys working on those bridges get paid, and they take their wages and spend them, and the businesses where they spend them do better.

In the Republican response, Marco Rubio talked about the ‘working class neighborhood’ where he grew up and where he still lives.  As it happens, he’s put his home up for sale, and he’s asking $625,000; that ain’t no working class neighborhood.  But fine, his parents were of modest means, good for him.  He said that he cares about the middle-class–they’re his people–and that Republican economic policies will decrease unemployment and help the middle-class.

The problem is, his actual plans are for more tax cuts for rich guys.  And the theory is, they’ll invest that money, and new businesses will start up, and employment will increase.  And if we were in an environment with high interest rates, and almost no investment capital available, it might work.  Freeing up investment capital only works as a federal jobs policy in an environment where there’s some shortage of investment capital.

Which there is not, right now. There are billions–trillions–of dollars sitting on the sidelines.  Interest rates are lower than ever before;they basically can’t go any lower. The current Republican orthodoxy is basically misplaced Keynesian macro-economics.  Keynes was all about freeing up investment capital.  But the Republicans are misapplying it. They’re taking a Keynesian strategy intended for one specific set of economic circumstances and applying it to all circumstances.

Here’s why it won’t–can’t–work.  Why do investors invest?  Because they think they’ll realize a substantial positive return on their investment.  So when some would-be entrepreneur comes to them with a project, they look at the business plan, at market research, at projected returns.  But one thing they also look at it is the current state of economy.  The question isn’t just ‘does this seem like a feasible investment?’  It’s ‘does this seem like a good investment right now.’  Not just, ‘is there demand for this product?’  But ‘is there demand for products like this, right now.’

Keynes called it ‘aggregate demand.’  Not ‘how much demand is there for this specific product,’ but also, ‘how much demand is there for any product right now, in his economic environment?’  And in a high unemployment economy, like the one we have right now, what’s needed is more government stimulus.  We need to pump more money into the economy generally.

Raising the minimum wage would help that, a little.  Not a lot, but some.  What’s really needed is a larger stimulus.  Typical liberal, right?  Spending us into oblivion, right?  Except the deficit isn’t actually hurting anything right now, and that can’t be said about unemployment.  When we’ve gotten unemployment under, say, six percent, then it’ll be time to reduce spending.  Not now.  Not yet.



2 thoughts on “Minimum wage

  1. Levi

    I have a lot of respect for someone one either side willing to name a target for the end of their policies. Too often I get the impression no matter what the state of the economy or what the level of spending or taxation, the answer from the Right would be “lower taxes” and from the Left would be “more spending.” It’s nice to hear someone name a time/situation in which their policy recommendation would change. 6% it is.

    1. admin Post author

      It’s just basic economics 101. Some policies apply to some situations, other policies for other situations.


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