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Hiking minimum wage won’t boost the economy

On Jan. 1st, Minnesota’s minimum wage went up. As the Hibbing Daily Tribune explained,

Small companies like many found in downtown Hibbing that earn less than $500,000 in revenue annually are set to pay a minimum of $8.15 an hour, an $0.11 cent increase from the $8.04 of today. The new amount is also applicable for any employee under age 20, training wages and the first 90 days of employment.

Large employers, such as Walmart and Lowes, that make $500,000 or more in revenue per year are scheduled to pay $10 an hour, a $0.14 cent jump from the current $9.86 an hour.

KEYC (News 12 TV in Mankato) reported that:

A labor market analyst with the Minnesota Department of Employment and Economic Development said it could boost the economy in more ways than one.

“Raising the minimum wage could increase spending by those people… raising that minimum wage could increase productivity as well as reduce turnover, so people will hopefully stay with their business longer if they’re earning more,” said Mark Schultz, regional labor market analyst for the Minnesota Department of Employment and Economic Development.

This is a common argument in favor of minimum wage hikes: that if government hikes the legal minimum wage employers and employees are permitted to agree to, it will give the employees more money to spend on the employer’s products. It is based on the notion that, if the price of labor goes up, demand for it will not fall – that labor demand is ‘price inelastic’, in the jargon.

But evidence suggests that when the price of labor goes up the quantity demanded goes down – that demand for labor is ‘price elastic’. This might not mean laying workers off, it might also mean cutting hours, that way an employer can buy less labor from the same pool of workers.

In neither case is it clear where this big boost is spending is going to come from. In the case of job losses, all the minimum wage hike has done is shuffle money from a larger pool of workers each earning less to a smaller pool of workers each earning more. In the case of reduced hours, the same money is spread among the same workers with each earning less. Neither increases the aggregate amount of spending money in the hands of workers.

This argument might be summed up as ‘If you hike it, they will come’. It is just another bad argument in favor of minimum wage hikes.

— John Phelan is a graduate of Birkbeck College, University of London, where he earned a BSc in Economics, and of the London School of Economics where he earned an MSc. He worked in finance for 10 years before becoming a professional economist.

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