Email
Minimum-wage workers do spend more after a hike, but there are reasons to be skeptical that raising the minimum wage provides much of a stimulus, according to a recent essay from a pair of officials with the Chicago Federal Reserve Bank.
Daniel Aaronson and Eric French in an essay in VoxEU estimated that adult workers at the bottom spend an extra $700 per quarter, on average, in response to a $1-per-hour raise in the minimum wage. For the most part, workers who receive a raise take on more debt to buy durable goods such as cars and trucks. Although they have to pay that debt off later, in the short term it’s considered a stimulus.
President Barack Obama’s proposal to raise the federal minimum wage to $9 from $7.25 per hour would affect about 13.4 million workers by the end of 2015. Supporters argue that should translate into tens of billions of dollars in stimulus.
The theory is plausible, Aaronson and French note, but the overall stimulative effects are unclear. That’s because minimum-wage hikes tend to boost spending in the short term by spurring low-wage workers to borrow more.
That might be less true today. Since 2008, banks have tightened lending standards for low-income Americans, making it harder to borrow. What’s more, Aaronson and French studied only minimum-wage adults. About 23 percent of current minimum-wage workers are teenagers, who may not be borrowing money to buy cars and trucks at the same rate.
Another key is how employers react. They could hire fewer low-wage workers or lay people off. Or they might raise prices, or respond by making their employees work harder.
Economists disagree on how companies respond, but if joblessness among low-wage workers goes up, that would blunt the stimulus effects. Raising Minimum-Wage Won’t Bring a Stimulus Essay Says
