In President Obama’s 2014 State of the Union speech, he rekindled a conversation that’s been simmering in the background since he raised the topic in the 2013 SOTU (oh, and since Dr. Martin Luther King Jr. brought it up in the March on Washington): Raising the minimum wage.
The federal minimum wage was established during the Great Depression. By 1968, it had risen to $1.60 per hour. In today’s dollars, that’s almost $10.75 per hour.
But in the real world, it’s been almost five years since the last federal wage hike; in July of 2009, it increased from $6.55 to $7.25 per hour. For a full-time worker, that means an annual salary of just over $15,000 per year before taxes, a number that falls far, far below living wages in most parts of the nation.
Pretty ironic for a law that was designed to pull American workers out of poverty, while at the same time increasing the amount of money flowing into the economy by upping consumer’s spending power.
President Obama has pledged to take on economic inequalities and announced an executive order that would raise the minimum wage for (future) federal contract workers to $10.10 per hour. Democrats are one-upping this, proposing to raise the wage for all workers to $10.10 by 2016.
Here’s why raising the minimum wage is sound policy that will benefit the economy as a whole.
1. Raising the Minimum Wage will Stimulate the Economy Without Raising Deficits
Increasing wages of the lowest-paid workers puts more money in people’s pockets. When people have more money, they spend it — and they’re more likely to spend it within their local communities on things like food, clothing and utilities, thus stimulating the economy without contributing to any state or federal budget deficits.
According to the Economic Policy Institute, a pay hike would affect about 30 million Americans, resulting in:
- More than $50 billion in increased wages
- A $32.6 billion increase in GDP
- The creation of 140,000 new jobs
2. Jobs, Jobs, Jobs
One of the loudest arguments coming from the political right and others who oppose raising the minimum wage is that it’ll kill job growth. However, not all economists agree — by a long shot. In fact, a number of studies indicate that wage increases do not lead to job loss, even during periods of economic instability. Research includes:
- Two award-winning studies tracking employment statistics from Pennsylvania and New Jersey before and after wage increases; no jobs were lost and, in fact, jobs were gained after a wage increase in New Jersey
- A study (lauded by Paul Krugman and Bloomberg News) from the Center for Economic and Policy Research Center finds that minimum wage hikes have no discernable effect on employment.
- A study of all wage hikes over a 20-year period finds no evidence of job loss
- A study comparing job loss in all states that raised their minimum wage from 1990 to 2006 (hint: no job loss found)
- A report from the Fiscal Policy Institute finds that states with higher wages actually experience more small business growth
3. A Wide Impact
Though the lowest wage earners in the country would certainly benefit from a pay hike, a wide swath of groups that don’t necessarily fit the low-wage stereotype, i.e. teens and those with little education, will also reap a number of benefits. The Economic Policy Institute estimates that positively impacted populations include:
- Workers with some college education at 44 percent
- A disproportionate amount of women at 56 percent
- Workers over age 20 at 88 percent
- Full time workers at 55 percent
- Non-Hispanic white workers at 54 percent
Then there’s the spillover effect. Workers who earn just above the minimum wage are also likely to experience a boost in earnings — and thus in purchasing power. Best of all, all of these benefits come without placing an additional financial burden on the public sector in the form of deficits.
It just seems like a no-brainer: Pay workers more, they spend more, putting money back into the economy and stimulating growth. It’s a win-win.
Listen to our podcast on the topic with Win Damon on WNBP.com FM radio WNBP in Newburyport.
Stu Steinberg of Eaglerock Financial, Inc. has worked with families and businesses for more than 20 years, helping them work toward their financial goals through a holistic, well-rounded approach rooted in objectivity, education, and empowerment. Stu is highly regarded by clients and colleagues for his unique combination of investment, CPA and entrepreneurial experience in the high net worth market.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
Advisory services offered through LPL Financial, A registered investment advisor.
