Correcting Harold Meyerson's Math On The Minimum Wage
Harold Meyerson is trying to run a pretty strange idea up the flagpole. It’s the idea that raising the minimum wage will increase spending enough, produce enough of a stimulus to the economy, that it will overcome the manner in which a rise in the minimum wage will destroy jobs. It’s certainly a cute idea (and if true one that argues we should move to a $100 an hour minimum pretty quickly) but a strange one. And the reason for the strangeness is that Meyerson gives us sufficient numbers for us to be able to disprove it. Here are those important numbers:
Opponents of a higher wage have invoked a recent study by the Congressional Budget Office that argued a raise in the national minimum wage from $7.25 to $10.10, as President Obama has advocated, might cost up to 500,000 jobs. But even that study said that the raise would increase the wages of 16.5 million Americans — at least 33 times the number of those who might lose jobs — and elevate 900,000 people out of poverty. OK, let’s take Meyerson’s numbers as he gives them to us. So, on the downside there’s 500,000 job losses. But the claim is that those rising incomes for the 16.5 million will more than offset this. So what is that rise in incomes? Assuming a 2,000 hour working year (high, but let’s be generous to Meyerson’s argument) and that all 16.5 million gain the entire pay rise (very generous again, as the raise would move a lot of people from $8 and hour, $9 an hour to that $10.10) and we get something like $100 billion in extra wages (16.5 million x 2,000 hours x $2.85 an hour) going to those minimum wage workers. This is clearly larger than the 7.25 billion lost by those half million who lose their jobs. So, is Meyerson correct then?
No, no, he’s not. Because we’ve actually tried this experiment recently. We have had a large stimulus program in the US. And we know how much was spent on it and we at least have estimates of how many jobs were created. These are here:
The CBO report provided a broad range of the estimated number of full-time jobs created because of the stimulus — from a low of 500,000 to a high of 3.3 million jobs. That’s what we got for the $800 billion spent. $100 billion in our higher wages will lead, we might think, to one eighth of the effect. Somewhere between 63,000 jobs and 410,000 jobs. Which is, we can note, rather smaller than the 500,000 number.
But sadly this is also wrong. For the stimulus was the injection of new money into the economy: some of it was the Fed creating new money, other parts of it were increased borrowing and both of these standard theory predicts would have the “full effect”. That is, of the $800 billion there was $800 billion of stimulus. This isn’t true of a change in the minimum wage. For, as Meyerson points out:
What critics of a higher minimum wage ignore is that, by putting more money into the pockets of the working poor — a group that necessarily spends nearly all its income on such locally provided basics as rent, food, transport and child care — an adequate minimum wage increases a community’s level of sales and thereby creates more jobs. Yes, the poor spend nearly all of their money. But a change in the minimum wage isn’t creating new money which the poor then spend. It’s taking extant money from somewhere else in the economy and giving it to those poor. So it is only some percentage of the transfer which is actually stimulus. What that percentage is comes from the very Keynesian idea of the marginal propensity to save (or its inverse, to spend). Which is, on a generous appraisal, about 15%. The richer parts of society tend to save about 15% of their incomes. The poor tend to spend 100% of their incomes. So, if we move money from richer people to poorer (and given that we’re not creating new money here, and the poor are getting more, it must indeed be coming from the richer people) the stimulus is only 15% of the total amount of money being moved.
Or, of those extra $100 billion in wages we would expect only $15 billion to be stimulus. The stimulative effect of the other $85 billion in higher wages is offset by the loss of stimulus from whatever the original owners of the money would have spent it upon.
And going back to our benchmark set by the stimulus program itself if $800 billion gets us 0.5 to 3.3 million jobs then $15 billion in stimulus gets us around 2% of those numbers, or 10,000 to 65,000 jobs. Which is, we can all note, rather lower than the 500,000 jobs which the rise in the minimum wage will destroy.
There is some hope for Meyerson’s thesis, for the stimulative effect of the poor’s greater marginal propensity to spend is indeed there. It’s just that it’s not large enough to produce the effect he claims.
Or, as Thomas Firey puts it:
It seems far more likely that mandating a small wage increase for a small group of workers who work a small number of hours will not have much stimulatory effect on the economy. It may not even be enough to counterbalance the negative economic effects of would-be workers who can’t find—or lose—their jobs because of the mandated increase. Yep, sounds about right.
forbes.com |
