The Surprising Benefits of Raising the Minimum Wage

The notion of raising the minimum wage has moved back into the national spotlight courtesy of U.S. President Barack Obama, who last week called for an increase in the federal minimum rate from the current $7.25 an hour to $10.10.

It's an idea the president last mentioned publicly in his State of the Union speech in February, when he called for raising the minimum wage to $9 by 2015.

Last Thursday fast-food workers in 100 cities brought still more attention to the issue by staging a nationwide walkout/protest to criticize the current minimum wage level and call for an increase to $15 an hour.

Opponents - including many conservatives - see higher minimum wage as harmful for business. It's a policy conservatives routinely attack, claiming that increasing it will force businesses to cut jobs and raise prices - hurting the very people it is supposed to help.

But raising the minimum wage would not only benefit low-income workers, it would stimulate the U.S. economy and save the government billions of dollars.

It's an issue that should have bipartisan support from across the political spectrum. The benefits of raising the minimum wage make at least as much sense from a conservative perspective as from a liberal perspective.

And, curiously enough, the conservative reasons for a minimum wage raise are the most compelling...

Venture capitalist Nick Hanauer, the founder of Second Avenue Partners, argues that raising the minimum wage is in fact essential to maintaining consumer demand.

"The fundamental law of capitalism is that if workers have no money, businesses have no customers," Hanauer wrote in a Bloomberg column in June. "That's why the extreme, and widening, wealth gap in our economy presents not just a moral challenge, but an economic one, too. In a capitalist system, rising inequality creates a death spiral of falling demand that ultimately takes everyone down."

The Benefits of Raising the Minimum Wage for Businesses

One of the primary objections from opponents of a minimum wage increase is that doing so will kill jobs and hurt profits, and by extension the U.S. economy.

But several studies, as well as some conservative thinkers, say that's backwards...

For example, a 2012 study by the non-partisan think tank Demos on the effect of raising the minimum wage on retailers found that U.S. gross domestic product could actually get a $15.2 billion boost, that 132,000 jobs would be created, and that the retailers would enjoy as much as $5 billion in additional revenue.

A 2011 study by the Chicago Federal Reserve showed that every dollar added to the minimum wage increased consumer spending for that household by $2,800 a year.

It's simple: If you raise the minimum wage, you put more money directly into the pockets of millions of people most likely to spend it. Just increasing the rate to $9 an hour would boost the wages of 13 million U.S. workers, according to the Economic Policy Institute.

"Raising the annual income of each such wage-earner couple by $8,000 or $10,000 would immediately send those same dollars flowing into the regular consumer economy, boosting sales and general economic activity," wrote Ron Unz, publisher of The American Conservative, in a paper last year calling for a rate increase to $10 to $12 an hour.

And while industries like retail and fast food restaurants would face higher costs, even they would enjoy some of the benefits of raising the minimum wage.

For one thing, higher wages would reduce turnover, which would save on operating costs and result in a better-trained, more productive workforce that would deliver more sales.

In addition, with all low-wage workers spending more, some of that also would come back to the business in the form of higher revenue.

Studies also show that such benefits returning money back to affected businesses, as well as other ways of cutting costs, mean they would not have to increase their prices as much to cover their employees' higher pay.

Demos estimated that a minimum wage raise to $12.25 would raise costs to a middle-income family by just $36.80 per year, and to a lower-income family by just $24.87 per year.

In other words, we're talking about price increases so close to ordinary inflation that they'll hardly be noticed.

As for the much-feared job losses at the affected businesses, they, too, would be minimal. As Unz points out, few of these jobs can be automated or outsourced. More likely than job losses would be cutbacks in hours, and even then many low-wage workers would come out ahead.

Even small businesses, which are more likely to struggle with an increase in the minimum wage, won't lose many jobs. In a recent Gallup poll, 64% said an increase to $9.50 an hour would not force them to reduce hiring.

The Benefits of Raising the Minimum Wage for Government

Republicans often decry the expansion of the welfare state, and the increasing dependence of millions of Americans on government assistance - not to mention the huge budget deficit and the $17 trillion national debt.

Well, raising the minimum wage would be a great way to save the government billions of dollars. Republicans should be clamoring for it, not opposing it.

It's well-known than many of the working poor use public assistance to get by, effectively subsidizing the profits of big corporations like Wal-Mart Stores Inc. (NYSE: WMT) and McDonald's Corp. (NYSE: MCD) with tens of billions in taxpayer money each year.

According to a Berkeley Labor Center Study, the federal government spends $7 billion a year on assistance to fast food workers alone.

And not only would raising the minimum wage save the government money, but it would  do something the Obama administration and the U.S. Federal Reserve have struggled to do for five years: jump-start the U.S. economy. And at no cost to taxpayers.

"In effect, [raising the minimum wage] represents an enormous government stimulus package, but one targeting the working-poor and funded entirely by the private sector," said Unz.

The real debate should not be whether to raise the minimum wage, but by how much. Clearly, going to, say, $15 an hour would have more negative consequences than positive ones. But an increase of $1 an hour or less probably wouldn't do enough.

And if Washington lawmakers really wanted a minimum wage that worked, they'd get creative. For example, Australia has a tiered minimum wage that pays younger workers less, since they're more likely to be living with parents.

Companies can choose between younger, less efficient, less responsible workers and older, more productive, but more expensive workers. (Another fun fact: Australia has an adult minimum wage of $16.37 an hour, with an unemployment rate of 5.7%.)

Ultimately, Congress must answer one simple question: Does raising the minimum wage do more harm than good, or more good than harm?

The answer should be obvious.

Action on raising the minimum wage will have to wait at least until Congress passes a Farm Bill, which is an odd bird that combines huge subsidies for farmers with the budget allocation for food stamps. But if Congress doesn't pass the bill by the end of the year, you'll be paying $8 a gallon for milk...

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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