Minimum-wage misconceptions

Alternet:

Contrary to right-wing propaganda, decent pay for workers helps the economy and boosts job creation.

Sen. Tom Harkin, Democrat of Iowa, has introduced a bill to raise the federal minimum wage to $9.80 from its present level of $7.25. Polls are showing many voters in favor, though they are confused about what it would mean for the job market. The truth is that a move would be good for a slow economy and have a positive impact on the job crisis. Naturally, this has led to the usual cries of opposition, largely based on the notion that raising the minimum wage hurts the very people it is supposed to help.

Business will not hire more workers until it has more sales. Consumers will not spend more until they’ve got more jobs. A private-sector recovery requires 300,000 new jobs every month. But the private sector doesn’t need 300,000 new workers per month until there exists sufficient spending power in the economy to induce them to hire those workers. How is retaining a static, or reduced minimum wage, going to achieve this?

Higher wages means higher income and thus higher consumption spending, which induces firms to employ more labor. So the truth is that economic theory does not tell us that raising the minimum wage will lead to more unemployment; indeed, theory tells us it can go the other way — raising the minimum wage could increase employment. That’s one of the reasons Henry Ford believed in paying his workers a decent wage: so that they could buy his product.

The truth is, if you earn your money through wages (unlike many of the 1 percent, who earn through things like investments and a tax system biased in favor of capital gains over income) then a higher wage, minimum or otherwise, would mean that you’d spend the additional dollars, creating jobs for other workers. You’d pay down your mortgages and car loans, getting yourself out of debt. You’d pay more taxes — on sales and property, mostly — thereby relieving the fiscal crises of states and localities. More teachers, police and firefighters would keep their jobs. America would get a virtuous cycle toward higher employment and, more importantly, the cycle would be based on a policy that creates higher incomes, not higher debt via credit expansion.

As far as the minimum wage goes, the jobs we’re talking about are in non-traded services like checkout clerks, hair cutters, domestic help and food-service workers. When checkout clerks and cooks earn more in wages, then businesses start getting the sales required to induce them to hire more workers. And if sales are robust enough, then guess what? Even more workers will be hired, or wages will be increased.

The point is that wages are a source of demand, as well as a cost input. Reduce wages and demand plummets, which more than overrides any cost savings derived from paying less to workers (especially given today’s paltry minimum wage, which is hardly a living wage for any American).

Continue reading here.