Exclusive Commentary

Breaking the Deadlock: How Raising the Minimum Wage Can Support the Economy without Adding to the National Debt

Michael Reich, Institute for Research on Labor and Employment, University of California at Berkeley - Posted March 7, 2011


While debates in Congress over how to stimulate the economy without swelling federal budgets continue, the truth is that there is a way to promote growth without increasing government spending or adding to the debt: raise the minimum wage.

States that raise the minimum wage can help inject cash into the economy without using a single taxpayer dollar. This can happen in a number of ways.

First, investing in low-income families is a stimulus. Raising wages for the nation’s lowest-paid workers puts money into the hands of people who tend to spend on necessities rather than save. This increases the money that is sent straight back into the economy, boosting demand for goods and services. According to the Economic Policy Institute, President Obama’s campaign promise to raise the minimum wage to $9.50 by 2011 would generate an additional $60 billion in spending over the next two years.

Second, a minimum wage increase won’t reduce employment rates. While a simplistic understanding of supply and demand implies that raising wages should reduce the number of jobs employers offer, the reality of the labor market is much more complex.

Low-wage employers typically endure high rates of employee turnover and often struggle to fill their job vacancies. My research shows that a higher wage improves recruitment by making a job more attractive. It also helps reduce absenteeism and increases the retention of experienced workers. This, in turn, provides employers with the greater productivity only more experienced workers can deliver.

A comprehensive new body of research that I have developed with my colleagues supports this view. Our work examines increases in minimum wages over the last 20 years, which in turn validates more than 15 years of economic research. The net findings are clear: wage increases do not result in job loss.

In one paper I recently published in the prominent Review of Economics and Statistics with Arindrajit Dube of the University of Massachusetts and William Lester of the University of North Carolina, we looked at every pair of neighboring counties in the United States that straddle a state border and that had different minimum wages at any time between 1990 and 2006.

The comparisons weren’t straw men. For example, in 2007 Washington’s minimum wage rose to nearly $3 above Idaho’s. So we compared employment in Spokane County, Washington, with neighboring Kootenai County, Idaho, to find out whether the wage hike had led to job loss. We then repeated that calculation for every such county pair and wage difference on the Washington border and across the United States over a 16 year period, creating a national estimate that controls for other relevant economic factors.

What did we find? Minimum wage increases do not cause job loss in the counties with higher minimum wages than their neighbors across the state border.

In another study, Dube and I partnered with Sylvia Allegretto of the University of California Berkeley to examine the impact of minimum wage increases on employment during periods of recession. We found that even during the Great Recession of 2007-2009 a minimum wage increase did not lead to job loss.

We’ve all watched as Wall Street bankers have recovered nicely from some lean times, while low-wage workers still struggle to support their families. If our economy is truly to rebound, all Americans – including all those who are now part of the low-wage economy – must get a boost.

This isn’t a small segment of American earners, but a growing cohort. News reports suggest that even people with years of experience in middle class occupations are re-entering the workforce in minimum wage jobs. At a time when families are struggling, helping the swelling ranks of low-wage workers keep a job and put more money in their pockets makes sense.

State legislators are already introducing bills this year to raise minimum wages in Maryland, Illinois, Massachusetts, and California, among others. More states should follow their example by helping low-income families as a way to increase spending in the overall economy.

Many economists argue that our economy is desperate for a large infusion of public spending to get people back to work. We also know that as long as partisan budget battles reign on Capitol Hill, such spending may not be forthcoming. That’s why state leaders and others can bridge the divide by embracing a stimulus that doesn’t swell public coffers.

The bottom line is we need to help Americans weather this crisis by increasing the minimum wage.

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Michael Reich is Director of the Institute for Research on Labor and Employment and Professor of Economics at the University of California at Berkeley.