Skip to comments.Can Increasing the Minimum Wage Boost GDP?
Posted on 12/07/2011 8:08:11 AM PST by Kaslin
Does increasing the minimum wage increase GDP?
Bloggingstocks' Joseph Lazaro outlined the theory that it might back on 1 August 2009, shortly after the U.S. federal minimum wage reached its current level of $7.25 per hour (emphasis ours):
... the U.S. Federal Reserve will be monitoring prices and costs to see if the higher minimum wage is creating inflation havoc at a time when U.S. businesses least need another concern to deal with. Businesses have enough to worry about; and some are struggling just to maintain operations for another quarter or two -- the recession has been that damaging.
But the Fed will also be looking for signs of another side-effect, and this one is a positive one: a GDP boost. That's because millions of workers are going to get a raise that they otherwise would not have gotten, and that will increase their purchasing power.
The significance? Some of those increased-pay workers will choose to spend -- perhaps buying a washer or drier, making a down payment on a used car, or paying down a debt. It's quite possible -- although in these "frugal consumer" economic times no one is certain- - that the wage hike will increase U.S. GDP, serving as a small engine of growth as the U.S. economy inches back toward health.
It's an intriguing possibility isn't it? But has it worked out that way?
One way we can find out if boosting the federal minimum wage has boosted GDP is by examining the economic fortunes of the people most likely to be earning minimum wages in the United States: teenagers and young adults.
Together, individuals between the ages of 15 and 24 have consistently made up approximately one half of all minimum wage earners, so we should be able to use the personal income data the U.S. Census has collected and published for this age group for each year since 1994.
First, let's consider the population of 15-24 year olds in the United States, and the number of those individuals counted as having income from 1994 through 2010.
Over this time, the federal minimum wage has increased from $4.25 per hour in 1994, to $4.75 in 1996 and then 50 $5.15 per hour in 1997, where it held level until 2007. Beginning in 2007, it was increased by 70 cents per hour once a year up until it reached its current level of $7.25 per hour in 2009.
What we see however is that the number of teens and young adults with incomes has fallen over time. Our next chart shows the percentage of Americans between the ages of 15 and 24 who were counted as having income in the U.S. Census' Current Population Survey for each year from 1994 through 2010.
In this chart, we find that the percentage of teens and young adults who had incomes peaked in 1995, with 75.3% of the entire Age 15-24 population counted as having earned income in that year, which has since fallen to 59.9% as of 2010.
So far, both these charts indicate that the number of teens and young adults in the U.S. workforce has fallen from 1995 through 2010 - these charts don't tell us anything about how teens and young adults might have benefited from higher pay obtained through a rising minimum wage over time!
For that, we'll dig deeper in the U.S. Census' data and extract the data for the aggregate amount of income earned by individuals Age 15-24. Since one way of measuring the U.S. Gross Domestic Product is to add up all the income earned by people in the United States, we can use the Census' estimate of the aggregate income earned by U.S. teens and young adults to represent their contribution to the U.S.' GDP.
The easiest way to do that is to compare the amount of income earned by all U.S. teens and young adults in 1995, when the percent share of teens in the U.S. workforce peaked with the total amount of income earned by all U.S. teens and young adults in 2010, the most recent year for which we have data.
Coincidentally, selecting these particular years for comparision works especially well for our purposes, since it spans the increases in the U.S. minimum wage from $4.25 per hour to $7.25 per hour, with 1995 being one year before the first minimum wage increase in our period of interest occurred, and 2010 being one year after the most recent increase in the U.S. minimum wage took place.
We'll also adjust the numbers to account for the effect of inflation, using an animated chart to show the results.
What we find in examining this chart is that for the 15 year span from 1995 to 2010, the nominal aggregate income of U.S. teens and young adults increased by 14.75%, from roughly $302.9 billion to $347.5 billion.
But most remarkably, in terms of constant 2010 U.S. dollars, the aggregate income of U.S. teens and young adults fell by 0.56% from $349.5 billion in 1995 to $347.5 billion in 2010. For all practical purposes, despite a 70.6% increase in the nominal value of the U.S. federal minimum wage from $4.25 to $7.25 (a 21.8% increase in real terms), the total amount of income collectively earned by the predominant earners of the U.S. minimum wage in the United States is unchanged.
Let's take a step backwards and consider the nominal income distribution of teens and young adults in both 1995 and 2010 in nominal terms.
Our next animated chart shows how many thousands of Age 15-24 individuals the U.S. Census counted within each $2,500 increment of total money income in both 1995 and 2010.
Here, we find that the distribution of income has shifted primarily at the lower end of the income spectrum. Our final chart quantifies the changes for each of the U.S. Census' measured income increments.
Here, we note that an individual earning the U.S. federal minimum wage of $7.25 per hour in 2010 who works full time (2,080 hours per year = 8 hours a day, 5 days per week, 52 weeks per year), would earn $15,080 in a year. That puts all the income affected by increases in the U.S. federal minimum wage over time below this level.
What we find is that this income range at the lowest end of the income spectrum for Americans between the ages of 15 and 24 is the only income range where there have been reductions in the number of individuals with incomes between 1995 and 2010.
We also find that the number of individuals with incomes below $15,000 has fallen by 5,045,000 from 1995 to 2010. Meanwhile, we find that the number of Age 15-24 individuals with incomes over $15,000, which would be considered to be largely unaffected by increases in the U.S. federal minimum wage over time, has increased by 3,105,000.
Overall, there are 1,940,000 fewer individuals between the ages of 15 and 24 with incomes in 2010 than in 1995.
Consequently, we find that increasing the federal minimum wage has failed to increase GDP over time. Worse, we find that increasing the federal minimum wage has actually increased income inequality within the Age 15-24 population from 1995 through 2010, as the same aggregate income, when adjusted for inflation, is effectively being spread among nearly two million fewer people.
Returning to Joseph Lazzaro's thoughts on the topic:
... if the Fed and other organizations can verify that the minimum wage increase has boosted GDP without a loss of jobs, or inflation, Congress may to consider another decision in the quarters ahead: a decision to raise the federal minimum wage again, this time to $8.25 per hour.
In our view, the only reason the U.S. Congress would choose to increase the federal minimum wage again would be to ensure the onset of a new recession.
This concludes our annual anniversary post, where we celebrate the biggest ideas we've developed during the past year! This year's anniversary post was a bit unique in that it combines two of the areas in which we've made a mark (or left one!): the real impact of minimum wages on the U.S. teen population and the real nature of income inequality in the United States.
As for the biggest ideas we've developed in previous years, here's the list:
Thank you for joining us for our anniversary! We appreciate that there are a lot of ways you can choose to spend your time, and we greatly appreciate your willingness to share so much of it with us over the past year.
I would argue adding up payroll is a lousy way of computing private sector GDP. Seems to me “sales” is the better term. In this manner increase in min wage adds to cost of sales but not necessarely sales given it will be partially or in some cased totally offset by earnings reductions. Where it goes into sales (price) there can be a offset in a decline in sales as the product price increases. All in all its a bad idea. Let markets be markets.
The worst thing about minimum wage laws is that destroy the human spirit and keep people down. They are disincentive from going out and improving yourself to make more money. Government forces employers to pay people more to stay in mind and spirit-killing zombie jobs that they might otherwise be forced to get out of to make more money. Minimum wage laws are making millions of people into mind-numbed zombies who will never really be alive.
Currently in Williston, ND the counter workers at McDonalds are making $20 per hour. Why? They can't get help because everyone wants to make the big bucks working in the oil shale operation where jobs are plentiful. An apartment in a motel rents for about $6,000 per month. The GDP in this area is proportionately higher, but so is inflation. How long will it last? Not indefinitely.
The GDP equation is a rigged formula designed specifically to illustrate Keynesian philosophy. Unfortunately, all too many people think it's some discovered naturally-occurring axiom like Avogadro's Number or Pi.
What happens when the minimum wage is increased is, that businesses reduce the hours of the minimum wage earners, so that they actually get less paid then they did before the increase. I know that, because I am speaking from personal experience
Maybe yes - for 5 seconds.
Then people start getting laid off, companies slow down hiring replacements and new entry level employees.
Raising the cost of doing business with no increase in productivity is just backdoor inflation.
Eventually prices go up to compensate for the increased labor cost and any perceived boost in GDP is meaningless.
There is no increase in the real production so there is no increase in the real GDP - only an increase in the cost to produce the same amount of product. That is inflation.
Hah! As if the $money$ just comes from nowhere. (which, I guess, if we were talking "currency" -- rather than wealth -- it actually does)
If this were the case, why not simply raise the minimum wage to ONE BILLION DOLLARS!
Spoken like someone who has no clue what wealth even is, much less how it's created.
Not in the long run.
The higher wages cause the cost of production to increase so their employer must raise the selling price.
So when the wage earners go to the market with more money in their pockets they find prices are higher and can only buy the same amount of goods as before.
That's inflation, not an increase in real GDP.
As any military family will tell you increases in the housing allowance is immediately eaten up by a similar, or higher, increase in rents. So any “extra” cash disappears before it even reaches the bank.
Do you think any other sector of our economic lives is different?
BTW - I would LOVE for some economic guru to plot the increases of the minimum wage against the cost of gas, happy meals, postage stamps, etc. Might make for some interesting reading. In fact, it will very damaging to the political positions of almost every “professional politician” since the 1960s.
Minimum wage legislation is just another way for politicians to pander to poorly-educated voters and buy their votes.
From a purely economic point of view, it makes no sense whatsoever.
I think we dont need a min wage but a max wage!!!
If a CEO makes $1.5 million dont you need to delegate more??
I don’t suppose the author took into account the effect outsourcing, NAFTA, and illegal immigration on hiring at lower wage levels.
Minimum wage has increased very little in comparison to living costs over the last 40 years. The menial production jobs that used to employ younger workers are now done either overseas or by illegal immigrants. And people are staying in school longer, because employers have raised the bar. A fairly high percentage of entry-level white collar jobs now require college degrees where a HS diploma used to suffice.
The net result is people getting into the workforce later, and making quite a bit less in real dollars (especially if you take into account student loan repayment) early in their careers than previous generations.
while everybody beyond burger flipper gets an effective pay CUT due to the increased costs, across the board, for every item we purchase everyday...
econ 101 should be a required course, even in business majors...
I would suggest a little thought experiment: suppose that there were a minimum wage of $100/hour, but it only applied to people born on Tuesday. Suppose, further, that there was someone who would, for $50, impeccably alter one's credentials to shift one's official birthdate plus or minus three days. Would such a person get more business from people who weren't born on Tuesday but wanted to take advantage of the minimum wage, or from people who were born on Tuesday but wanted to be employable?
That isnt the big problem although it is a hidden tax of sorts. The problem is it deters employment especially for those with little or no skills (market value) who really need exployment experience.
Thanks for the ping!