Study: A Minimum Wage Hike Would Stimulate The Economy

A federal minimum wage increase would likely benefit the U.S. economy, a new Chicago Fed Letter suggests. Daniel Aaronson and Eric French, economists at the Federal Reserve Bank of Chicago, provided an estimate of the effects on aggregate household spending of the $9 minimum wage Obama proposed in his 2013 State of the Union Address.

The authors found that raising the wage by $1.75 would increase household spending by about $48 billion the following year, which amounts to .3 percent of GDP. If the possibility of job losses is taken into consideration, the authors calculate that spending would still go up by $28 billion, or .2 percent of GDP. However, most studies suggest minimum wage hikes do not result in job losses for various reasons.

Because minimum wage earners tend to be low-income and are likely to spend more of their income, raising their wages is particularly beneficial. As the authors explain, “In the near term, a minimum wage hike can stimulate economic activity by putting money into the hands of people who are especially likely to spend it.”

These findings run contrary to Republican opposition to a raise in the wage. Almost immediately after President Obama proposed an increase, Speaker of the House John Boehner (R-OH) rejected the idea, citing potential economic harms as his primary concern. Republican aversion to the minimum wage seems to have grown since then, as Lamar Alexander (R-TN) recently suggested the minimum wage should be abolished.


Yet a minimum wage increase now may be especially important since low wage jobs have led the recovery, comprising 58 percent of all jobs created. Many of these new jobs have gone to college graduates.

The need for a minimum wage increase is even more pressing given rising income inequality, to which the failure to raise the minimum wage has contributed. Over the last 30 years, CEO pay has grown 127 times faster than worker pay, which has remained relatively flat despite significant increases in productivity.

The social benefits are also important. A minimum wage increase may reduce violent crime and lift millions of people of color out of poverty.

Low-wage workers are now taking the stage with recent protests for higher wages and the right to organize. The fast food industry, where many of the strikes have occurred, is a prime example of the effects of a low minimum wage: A McDonald’s employee must work one million hours a year to earn as much as the company’s CEO.