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Boosting minimum wages, boosting the economy from the bottom up

October 15, 2016

2-minute read

Across the nation, talk of minimum wages and their impact is always the stuff of vigorous debate. This Sunday it was the focus of CBC Radio’s Cross Country Checkup with new host Duncan McCue from 4-6 p.m. EST.  I was asked to kick off the discussion, which was both rich with experience and nuanced with different perspective. It's available here, in case you missed it.

I first wrote about why we should be raising the roof about the benefits of raising the wage floor in 2013.  The argument went: boost the minimum wage and you boost the economy, from the bottom up. (Double click on the charts and they pop up so you can see the differences across the provinces.)

A year later, after Ontario raised the rate, I wrote on why the story was not done, and why raising minimum wages further would continue to be on the political agenda.

Economic theory teaches us when the price of something goes up, our consumption of it falls.  So theory says: raise wages, kill jobs. (Apparently that is restricted to minimum wages.  CEO pay seems exempt from this scrutiny.)   But what works in theory doesn't always work in practice.

In 2014, 13 US states raised the minimum wage, and 11 of them saw job growth, not job loss.  Five of the ten states with the fastest job growth were states in which the minimum wage was raised.

Similarly in 2015, 6 of the 11 states that increased minimum wage saw above average job growth.

That year the US Department of Labour produced a minimum wage mythbuster that is worth reading.

The findings of a recent report which examined the impact of all federal minimum-wage increases in the US since 1938 also defies conventional economic theory, showing  "no correlation between federal minimum-wage increases and lower employment levels, even in the industries that are most impacted by higher minimum wages. To the contrary, in the substantial majority of instances (68 percent) overall employment increased after a federal minimum-wage increase."

An analysis of the impact of raising the minimum wage from $9 to $15 in NY also shows net job gains, and more economic activity due to the increase in incomes for 36.6% of the workforce.

In July CNBC, of all places, praised the virtues of raising the minimum wage on the whole economy. It noted:

The minimum wage does more than simply shift the wage distribution toward higher pay — it effectively compresses the lowest wages. The end result is a reduction in wage inequality below the median wage — a little under $30,000 for individuals.When interviewed by economists, employers often say that a wage hike would cause them to "delay or limit pay raises/bonuses for more experienced employees." But in practice economic data generally show little impact on the wages of the highest-paid employees.

At the level of the individual business, there is possibly no company more symbolic of "what's good for business" than Walmart.  It was therefore pretty surprising to hear this August, as Walmart beat profit expectations, that the company partially attributed the good news to the benefits of higher wages. The company said its profits rose "despite a more than 8% increase in operating costs from a year ago -- mainly due to the wage increases and increased spending on e-commerce."

But even though Walmart is now paying its workers more, the company said that the benefits of these higher expenses outweigh the costs:   "A Walmart executive told CNNMoney that customer service scores have improved since the raises went into effect. Workers are more enthusiastic -- and the pool of applicants for new jobs is strong, in part because of the higher wages."  This is a message long at the core of Zeynep Ton's work -- good jobs are good for business.

The narrative first offered in 2013  -- that consumers, not employers, create jobs; and that the minimum wage helps low-paid consumers buy more -- has gone from being dismissed by academics to becoming mainstreamed .... because of evidence.

We should be raising the roof about the benefits of raising the wage floor.

Armine Yalnizyan is senior economist at the Canadian Centre for Policy Alternatives. You can follow her on Twitter @ArmineYalnizyan

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