ANXIOUS business owners are often told by minimum-wage supporters to quit worrying, since a higher minimum wage supposedly means more customers with more money to spend.
It is an appealingly simple argument. Many have repeated it as Seattle considers raising the minimum wage. On Thursday, Mayor Ed Murray offered a plan to raise the minimum wage from the state’s $9.32 to $15 per hour over a three- to seven-year period depending on the size of the business.
Unfortunately, as minimum-wage expert David Neumark, of the University of California-Irvine points out in a study, “There is simply no evidence” that boosting the minimum wage would stimulate the economy through consumer spending.
SEIU-affiliated activist group Good Jobs Seattle recently expressed frustration on its blog that businesses are just “not seeing the tens of thousands of potential customers out there who aren’t yet spending money in their business because they can’t afford it on poverty wages.”
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Local minimum-wage advocates simply take the number of workers earning less than a proposed minimum wage, multiply it by the wage increase per worker, and conclude that increasing the wage floor creates millions of dollars in new consumer spending in the economy.
Labor-backed group Puget Sound Sage recently used this method in a policy brief to estimate that a $15 minimum wage in Seattle would generate millions in new economic activity.
Such simplistic estimates are of little value since they fail to account for the other effects of a minimum-wage increase — reduced business spending, higher prices and decreased employment.
National minimum-wage advocates make the same mistake. U.S. Labor Secretary Thomas Perez claims, “When we put more money in working families’ pockets, it boosts consumer demand, helping small businesses and jump-starting the entire economy.”
These slightly more sophisticated minimum-wage apologists, from the White House to the Economic Policy Institute, all rely on a single study when touting minimum wages as economic stimulus.
In 2011, Daniel Aaronson, Sumit Agarwal and Eric French — researchers at the Chicago Federal Reserve — published a caveat-ridden study examining how an increased minimum wage affects workers’ spending.
The study determined that a $1 hike in the minimum wage increased spending at affected households by about $700 per quarter “in the near term.” Activists stop right there and cite the study as proof the minimum wage expands the economy.
As the authors warn, however, their study is “silent about the aggregate effects of a minimum wage hike.”
For starters, two-thirds of the spending increase takes the form of debt, on average. According to the authors, “Most of the spending response is caused by a small number of households who purchase vehicles,” not basic necessities obtained at local businesses.
Such debt must be repaid, which limits future consumer spending. Still, it is undeniable that some households see their incomes and spending rise following a minimum-wage increase. The question is, do the economic benefits outweigh the costs?
The same research team has documented some of the negative consequences of a higher minimum wage. In a 2006 paper, Aaronson and French found that a 10 percent increase in the minimum wage decreased employment in the restaurant industry by 1 to 3 percent. The finding suggests a 60 percent increase in Seattle’s minimum wage to $15 an hour could decrease restaurant jobs by 6 to 18 percent.
Furthermore, Aaronson and French concluded in a 2007 study that “restaurant prices unambiguously rise” following a minimum-wage increase.
Taking only the negative employment effects into account led the researchers to conclude in a 2013 study, “A minimum wage hike provides stimulus for a year or so, but serves as a drag on the economy beyond that.”
Other studies reach similar conclusions. A 2010 study by Joseph Sabia, now at San Diego State University, concluded, “Far from stimulating an economy, an increase in the minimum wage has no discernible impact on overall GDP and could actually hinder growth in certain low-wage sectors.”
Business operators should beware of activists trying to persuade them of the merits of a higher minimum wage. “We’re all better off when we’re all better off” is the tautological minimum-wage slogan coined by Seattle’s Nick Hanauer, one of the leaders of the $15 campaign.
It might make a snappy sound bite, but it’s dreadful economics.
Maxford Nelsen is labor policy analyst at the Freedom Foundation in Olympia.