By André Lopes Massa
The debate over minimum wage is once again a hot topic in Washington after President Obama proposed in his State of the Union Address to increase the federal minimum wage to $9 an hour and adjust it to inflation each year by saying, “Let’s declare that in the wealthiest nation on earth, no one who works full time should have to live in poverty.” After hearing this, you could almost imagine John Boehner rolling his eyes and muttering “job killer” under his breath. Of course, this same argument has been muttered by corporate lobbyists and their Republican slaves since the federal minimum wage was introduced by in 1938 under the Fair Labor Standards Act and again in 1945 when Congress raised the minimum wage from 40 cents to hour to 60 cents an hour. During that time, the National Association of manufacturers claimed that “the proposed jump from an hourly minimum of 40 to 65 cents at once, and 70 and 75 cents in the following years, is a reckless jolt to the economic system. Living standards, instead of being improved, would fall – probably to record lows.” Following the increase, living standards in the U.S would improve dramatically for the next three decades. Despite this, conservatives would still use the same argument, with Nobel prize winning Austrian economist and Libertarian guru Milton Friedman saying, “The consequences of minimum wage laws have been almost wholly bad, to increase unemployment and to increase poverty. In my opinion there is absolutely no positive objective achieved by minimum wages.” Proving Friedman wrong yet again, living conditions would continue to improve after each increase in minimum wage, yet the same opposition is back again as we attempt to increase minimum wage to $9. But, as many studies have proven, the arguments made by Friedman and many other conservatives are not only false, but actually show that increasing minimum wage has the potential to lead to long-term economic growth.
One of the main problems with classical Austrian economics is that it completely ignores the relationship between consumer demand and spending and the accumulation of capital by businesses and entrepreneurs. However, as John Maynard Keynes would show, consumer demand is the primary engine of economic growth; when consumer demand is high, it forces businesses to acquire capital to increase production and meet that demand. More often than not, this is usually done through the hiring of more workers. The relationship between wages and consumer demand, according to Keynes, is that people will generally resist cuts in nominal wages unless they see a fall in the general prices of goods, showing that unemployment is the result of wages falling faster than the rate of inflation and the decrease in consumer demand that results. Thus, minimum wage laws that are indexed to the right of inflation will have the effect of reducing unemployment and leading to long-term economic growth because minimum wage laws will ensure that wages stay ahead of the inflation rate, keeping consumer demand high and forcing businesses to acquire capital and hire more workers, leading to increased worker productivity and long-term economic growth, and you can see this effect in the real world too.
While Obama’s plan would only increase the total yearly earnings of someone making minimum wage to $18,720, slightly below the official poverty line of $19,530 for a family of three, his plan would put more money into the pockets of 15 million workers, which according to Heidi Shierholz, an economist at the Economic Policy Institute, would pump more than $9 billion dollars into the economy saying, “When you get an increase in the minimum wage, you’re getting a wage increase to the people that are low-wage families who depend on these earnings to make ends meet. They have no choice but to spend that money in their local economy. That’s the stimulus you get.”
Due to Congress’s inaction regarding minimum wage, many states have taken action to follow this common sense economic policy, with as many as nineteen states enforcing minimum wage above the federal level. Cities too, have been enforcing their own increases in minimum wage. In Santa Fe, New Mexico, for example, the minimum wage was raised to a living wage of $8.50 an hour in 2003 and, 10 years later, Santa Fe enjoys the lowest unemployment rate in the state at 5.1 percent, while the local tourism industry continues to boom. Jeff Mitchell, a senior research scientist at the University of New Mexico’s Bureau of Business and Economic Research, found “no evidence of adverse effects” from the wage increase in Santa Fe.
San Francisco has also benefited from increasing their minimum wage to $8.50 an hour in 2004 and indexing it to consumer price index each year, where it currently stands at $10.24 an hour. At the time the law was introduced, the Golden Gate Restaurant Association said it would “bankrupt many restaurants” and kill jobs. However, a 2007 study by economists at the University of California found that restaurant growth went up after the law went into effect and was higher than their neighboring cities. Today, the unemployment rate in San Francisco is below 6.5 percent, lower than the state-wide average while restaurant growth has led post-recession recovery. A study done by Michael Reich of the University of California has shown that the local airline industry in San Francisco has also benefited from the increase in wages from $6.50 an hour to $10 an hour, where 35 percent of employers reported improvements in work performance, 47 percent reported better employee morale, 44 percent reported fewer disciplinary issues, and 45 percent reported that customer service had improved while employee turnover has dropped from 95 percent to 19 percent. But San Francisco isn’t the only place that has benefited tremendously from minimum wage laws. The same conclusion of the effects of minimum wage laws were reached by economists David Card and Alan Krueger of the University of California on a study of employment in fast-food restaurants in Pennsylvania and New Jersey after minimum wage was raised from $4.25 an hour to $5.05 an hour in 1992, where they found no reduction in employment as a result of the wage increase. Long story short, the real world shows that minimum wage laws work.
The overwhelming evidence shows that minimum wage laws work and they work well. Countless studies have shown that not only do the arguments of Milton Friedman and many other conservatives lack any fundamental link to reality, but that minimum wage laws actually benefit local communities tremendously and have the potential to reduce unemployment and lead to economic growth in the long run. It’s time that we ignored the corporate elite and addressed the issue of poverty. It’s time we make a decision that is not only economically beneficial for us, but morally obligatory as well. It’s time to raise the minimum wage.