President Barack Obama, in his annual State of the Union address, proposed raising the federal minimum wage to $9 an hour. Around the same time, Illinois Governor Pat Quinn proposed raising the state’s minimum wage to around $10 an hour over the next four years, which would be the highest in the nation. Illinois’ current minimum wage is $8.25 an hour, the fourth highest in the nation.
These proposals ignited a firestorm of debate focused on whether the minimum wage increase will hurt job growth in general and small businesses in particular.
Wisconsin, Illinois’ neighbor to the north, has begun aggressively campaigning to poach companies from the state. Kurt Bauer, head of Wisconsin Manufacturers & Commerce, told the Financial Times that he would “praise” Quinn’s proposal because it would make Wisconsin more attractive to employers.
But, in truth, the economic literature on this issue is mostly inconclusive.
Research shows that increases in the minimum wage have substantial poverty and inequality reduction effects.
Clearly, raising the minimum wage helps America’s neediest families. What’s interesting is that the research also says that the hiring disincentive created, if it exists at all, would be much less significant than the reductions in poverty.
Josh Barro, a commentator on Bloomberg View who is skeptical of minimum wage increases, concedes this point, writing, “The trade-off with any minimum wage increase is that it reduces inequality and poverty but may raise unemployment. As Evan Soltas wrote for the Ticker last month, within the wage range that is on the table, the former effect should be substantial and the latter effect small…”
Additionally, there’s solid economic evidence to support the notion that minimum wage increases would boost employment by giving the poor more purchasing power.
Two separate studies conducted by the Economic Policy Institute and the Federal Reserve Bank of Chicago concluded that minimum wage increases have a net positive effect on economic grown.
A recent Financial Times article states, “The Economic Policy Institute last year analyzed a bill that would have raised Illinois’ minimum wage to $10.65 by 2014, and found that it would increase economic activity by $2.5bn while creating 20,000 new jobs in the state.”
The Federal Reserve study concluded that households with workers who earn the minimum wage substantially increase their spending in the wake of a wage hike.
It’s easy to see why.
Poor and middle-income households have experienced stagnant income growth as we’ve begun to recover from the 2009 financial crisis. While the incomes of the very rich have growth substantially, those at the bottom are still suffering. There’s immense pent-up demand in these poor households, and a minimum wage increase would be the perfect policy choice to unleash that consumer spending.
On the other hand, it’s important not to overstate the benefits of minimum wage increases. There’s still a potential hiring disincentive, one which could conspire with other factors to stymie our current recovery. We shouldn’t ignore this downside, even though it could be relatively small.
One thing is clear: we must do something to help impoverished, low-income Americans. Those who are able to find work can barely get by with minimum-wage jobs. That’s why I propose a mix of policies: modest minimum wage increases coupled with greater commitments to social insurance programs like Medicaid and low-income tax credits. Employing both of these options will help bolster the incomes of the poor and increase consumer spending without putting too heavy a burden on small businesses.