Boosting Minimum Wage to Boost the Economy

That so-called Great Recession the U.S. economy is still recovering from has dramatically changed the way we handle our money.

Americans have been paying down their debt like angry squirrels burying nuts in November.

As of April 2011 – Americans had reduced household debt by more than $1-trillion in the last year and a half. The problem is…paying down debt won’t be enough to make the economy pick up steam much faster.

In order for things to really improve, average Americans have to start spending money again. However, discretionary spending (anything other than food, housing and health care) is down 7%, which is twice what it was following the recession of the 1980s.

Could raising minimum wage help pump more money into the economy?

The tricky thing is…we should be spending real money…not racking up more and more credit card debt. We realized we spent too much, borrowed too much, and saved too little in the past. Now many of us have changed our spendthrift ways.

Instead of spending, we are hanging on to our money with tight fists, as are U.S. corporations that are sitting on $2 trillion in cash. But nobody is hiring… because nobody is spending… and everybody is scared!

There is one big difference between corporations and the rest of the country….

CEO salaries grew by 23% in 2010. Wages for the average American grew by only 1/2%.

It’s been even worse for minimum wage workers. When adjusted for inflation, the real value of their compensation actually fell by 5% since the federal minimum wage was last raised in 2009 to $7.25 an hour.

If the minimum wage had kept pace with inflation over the past 40 years it would be almost $10.40 an hour.

The 2010 American Values Survey found that 67% of U.S. citizens approved of the idea of increasing minimum wage to $10 an hour.

The Economic Policy Institute estimates that that raising the minimum wage to $9.50 would result in more than $60 billion in consumer spending. Now that’s a pretty nice economic stimulus!

Those opposed to raising the minimum wage say it could hurt the economy by causing job loss. The logic being that if employers have to pay employees more, they’ll employ less people and stop hiring.

But Holly Sklar, author of “Raise the Floor: Wages and Policies that Work for All of Us,” pointed out in a recent opinion piece that long-term studies show that is not true.

“The most rigorous studies of the impact of actual minimum wage increases, including two studies published recently in the journal Industrial Relations and the Review of Economics and Statistics, show they do not cause job losses — whether during periods of economic growth or recession.”

There is also the idea that raising minimum wage could put a burden on small businesses. That may be true to an extent, but it would more likely squeeze much more out of major corporations.

Holly Sklar uses McDonalds, Walmart and two recognizable competitors as examples of how big businesses profit from a low minimum wage.

While McDonald’s chooses to pay many employees the minimum wage - In-N-Out Burger has a starting wage of $10 an hour and includes a good benefis plan.

In-N-Out Burger is an extremely popular fast-food burger chain based mainly in the western United States. People who visit rave about it, people who move away crave it. They may not be a fast-food giant – but they are successful and loved by their customers.

You could make as little as $15,000 a year working a full-time job at Wal Mart. But it’s competitor Costco offers a starting wage of $11 an hour for a yearly income just under $23,000. Costco also has the lowest employee turnover rate in retail.

McDonald’s and Wal Mart quite obviously spend much more money on marketing and advertising as well as expanding their operations. You could argue that building more Wally-Worlds and Mickey Ds would actually mean more jobs are being created.

That may be true – but if they are poor quality jobs – how much does it really help? If people are still struggling just to pay their bills and survive (non-discretionary spending) they have no money left to pump into the economy. What the U.S. needs is more quality jobs for the unemployed and underemployed.

Another possible negative of raising minimum wage could be higher prices. If businesses have to make up for the cost of a higher federal minimum wage, then they’d be more likely to make consumers pay more.

But does it have to be that way?

You’d think that just like with any budget there would be other ways to even things out. Cutting back on marketing expenses, finding more efficient ways of doing business are just two that pop into my head.

Of course, less advertising and marketing means less work for someone else. Sometimes increased efficiency does mean eliminating positions.

It starts to seem like another Catch 22, or maybe like the classic question of “Which came first, the chicken or the egg?”

Do we need consumer spending to pick up for the economy to improve, or do we need the economy to improve for consumer spend to increase?

David Leonhardt took a look at that question in an article for the New York Times Economix blog. Leohnart pointed out that in past recessions, consumer spending started to increase before the economy started adding jobs.

But he says that’s because there was pent up demand coming out of those recessions. Not so in the latest case. Leonhardt says it wasn’t just a housing bubble that burst in 2007, it was a consumer bubble.

“If you’re looking for one overarching explanation for the still-terrible job market, it is this great consumer bust. Business executives are only rational to hold back on hiring if they do not know when their customers will fully return. Consumers, for their part, are coping with a sharp loss of wealth and an uncertain future (and many have discovered that they don’t need to buy a new car or stove every few years). ” Read more about The Consumer Bubble

Basically, the demand for more stuff isn’t really there because we spent the last 10 years buying a bunch of stuff and getting into debt.

However there are some people who may be very ready to start spending some money…

Studies show that people at the lower end of earning tend to put the money right back into the economy. They get their car fixed, pay for needed home repairs, buy new clothes and spend money at many local businesses.

It certainly appears that if minimum wage really is too low, it something that could be weakening the U.S. economy.

What’s your opinion?

Should minimum wage be higher? How much?

Should the government have anything at all to say about setting a minimum wage?

What would happen if we let things run their course? Would companies compete for employees by offering better pay and benefits, or would they take advantage of the situation and pay workers as little as possible.

Let us know what you think!

Image Credit: zacklur

Image: photostock / FreeDigitalPhotos.net

+Kasey Steinbrinck writes about personal finances and the economy for Check Advantage. The online company offers cheap checks including QuickBooks checks for small businesses and artistic personal checks. Contact Kasey to request free original content for you blog or website.

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Tagged as: Consumer spending, David Leonhardt, debt, Economic Policy Institute, economy, employment, Holly Sklar, labor, McDonalds, Minimum wage, recession, united states, Wage