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Here is what a small raise can do for the economy

By Michael Randle

The argument for or against a minimum wage hike continues between the reds and the blues, as well as within the economic development community in the South. Should we stay the course with a minimum wage under $8 an hour to better compete with Mexico, the South's biggest competitor for jobs, or set a minimum wage just over $10 an hour, a wage floor most centrists support? That $10 per hour is, according to the MIT Living Wage Calculator, about right in most states in the South for one adult to be able to cover basic expenses plus all relevant taxes.

Politics aside, I read an interesting article recently on Seeking Alpha regarding what a small $2 per hour wage hike will do for the nation's economy. Seeking Alpha is a crowd-sourced content service for financial markets.

The writer explained that if a low wage earner received a $1 per hour raise this year and another $1 raise in 2017, that would be on average a 20 percent wage increase for 45 percent of workforce in this country that earn less than $25,000 per year. The pay increases, Seeking Alpha claims, represent $120 billion in added wages in 2016 and another $120 billion in 2017.

But it is really more. According to the writer, "If these wage increases were to materialize without job losses, the impact on consumption would be multiplied as more money enters the system, creating more wealth and jobs. In other words, if a consumer spends money, it creates jobs for people that spend more money. Therefore, a dollar into the economy in general is worth more than a dollar. This multiplier is higher for lower income households, which are the most impacted by the wage increases. Therefore, pay increases of $240 billion by 2017 may increase GDP by $400 billion per year by 2017, or up to $15 billion per month. To put that into perspective, this is 1/5 of the quantitative easing program after the 2008 crisis."

Note the writer isn't talking about a wage hike of $15 an hour that some are advocating. He is not even basing his claims on a hike to $10 per hour. According to the writer, we can put $400 billion into the U.S. economy just by raising the federal minimum wage to $9.25, if, of course few jobs are lost because of the higher cost of labor. What isn't known is how much effect higher wages will have on the prices of essentials, such as food and housing costs. We also don't know how much businesses would spend on equipment that will increase productivity, allowing the use of less labor.

If we do reach full employment sometime this year, the $2 per hour wage increase may be a moot point. It will take care of itself through natural economic conditions, without an increase in the minimum wage.




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