Studies On Both Sides Say To Increase The Minimum Wage

Author: November 19, 2012 2:59 pm

Historical wage growth comparison

It is a red-letter day when think tanks and pundits from both sides of the debate agree on something. Today is that day, when groups as diverse as the American Conservative magazine and the progressive think tank Demos┬ástand in agreement on one very important topic – raising the minimum wage.

In comparison to historic highs, the minimum wage today is at a near record low, you need to go back to the 1950s to find a lower effective minimum wage, as you can see here with this chart generated by the date provided by the Bureau of Labor Statistics:

However, the productivity of the US worker has never been higher, with the average GDP “worth” of the average worker coming to approximately $70,000 per year, a value to the companies which hire them of $33.65 per hour, making the US worker the most productive in the world, ahead of Germany, Japan, and leaving China in the dust.

In both studies, they find that the minimum wage in the US needs to be increased, and both make a solid argument as to why. Lower minimum wages do not translate to lower unemployment rates. In fact, the inverse is true, with countries such as Australia having some of the lowest unemployment rates (5%) while also having one of the highest minimum wages ($16.50 USD). An increase in the minimum wage effects not those in high-paying fields, but those at the bottom of the socio-economic ladder. Wage increases down at that end ripple faster because, simply, the people at the bottom have little room for luxuries, so added wages immediately generates added revenue into the economy without adding more than a minor blip to inflation.

Both groups studied the issue, and hit the same conclusion, that the minimum wage needs to be at, or above, $12/hour, in order to create a real benefit to society. They both found that increasing the minimum wage to $12/hour, the increase to the economy would translate to a true shot in the arm stimulus. For those arguing that this would increase costs, they are correct. The two papers do differ on how much of an increase in cost this would be, with one finding a total increase of 3% while the other finding a total increase of 0.5%. The difference between these two on the average retail purchase price change varies from $17.73/year to $106.34/year. But it would be a wage increase of 27% for your average minimum or low-wage worker, adding an estimated $11.8-$15.2 billion per year in extra spending, many times the amount paid.


This move would also reduce the number of people on programs such as the Earned Income Tax Credit, Food Stamps, and Medicaid as well by raising their standards of living to the point they no longer needed the programs. This would reduce the federal budget by several billion per year without painful cuts to programs which hurt people directly. As it is right now, these programs effectively subsidize lower wages, an unintended consequence of the stagnation of the minimum wage for decades.

Those supporting the increased minimum wage will surprise many as well. The Beast from Bentonville, Walmart itself, has lobbied congress for a significant increase in the minimum wage. Walmart, by virtue of its position as the low-cost king, finds itself in a hard place. It cannot raise its workers paychecks without raising its prices slightly, but then its competition can undercut their pricing by virtue of their refusal to raise wages. As a result, Walmart cannot raise its wages without hurting itself. By a minimum wage increase, however, all of its competition would be forced to match as its wages rose, preventing someone from undercutting them. For Walmart, a minimum wage increase would be the best thing to happen to them, as their employees can be raised to the point of being strong customers, with brand-loyalty, bringing in an estimated $1.3 billion in revenue per year, while increasing their costs less than half of that. A huge windfall for the Arkansas megacorporation.

For those thinking it would hurt the competitiveness of the United States abroad, you should think again. Minimum wage jobs are not manufacturing, but service and support roles, and cannot be outsourced. You cannot have someone in the Philipines tend bar, or flip burgers at your local sports club, or handle retail sales in the mall up the street. Those jobs are what is called “non-tradable service sector jobs” because they are tied to a physical location. They are immune from outsourcing. As for manufacturing jobs, the average factory worker would likely not see any wage increase at all, as their average wage is already many times the minimum wage. The benefit for an increase of the minimum wage grossly outweighs the problems.

One thing both discussed is that the United States simply has too many people with higher educations. While 30% of our workforce has a higher education degree, less than 20% of our jobs require such skill. This creates wage competition, and a personal debt crisis as one in three post-secondary educated people has to settle for a job unable to pay for their education, leaving them unable to particpate in the economy properly. But people go for this not because of an aptitude, or to fill the job market, but because it is the only way in which for many of them to have a livable wage, due to the floor, the minimum wage, having been stagnant for so long. They try to get ahead, to make enough to make a living, and find themselves further behind unless they have a stroke of luck.

Another thing which increased wages would do is eliminate one of the incentives for businesses hiring undocumented workers for lower end work. As it is right now, many jobs simply are too demanding for the amount of money one can make from them. Working 10 hour days of hard labor to bring home $77.50, just does not add up. However, with those wages increased from $77.50/day to $122.50/day, now you suddenly change the situation. It becomes large enough to be worth the labor associated with it for many people. And it would not hurt people at the retail level either. For example, the agricultural industry is one with a heavy immigrant force. The total cost for a years grocery bill would on average increase by just $15 per year. And unlike the illegals, the citizen-workers would be spending their money locally, not sending money back home. Eliminate the jobs for illegal immigrants, and the problem effectively solves itself. And some sectors, like food service, have not had a wage increase since 1991. Who on Capitol Hill believes that anyone can live while having the same paycheck today as they did in 1991?

It is not often when a left-wing think tank, and a right-wing magazine are in full agreement. When they are, it is a sign which we should take seriously. An increase of the federal minimum wage to $12/hour is the solution to many of the problems facing the United States today.

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