As Tacoma considers whether to create its own minimum wage above the state level, many have proclaimed the importance of data-informed decision-making and crafting a policy that is right for Tacoma.
But neither the rules of politics nor the laws of economics are so easily conformed.
Despite lofty intentions, the minimum wage debate remains a highly politicized issue. Research is routinely misquoted, ignored or conducted so as to achieve a pre-determined result. There is no better example than the argument made by minimum wage advocates that raising an arbitrary government minimum wage will stimulate the local economy.
At a June 30 City Council work session on the minimum wage, Councilman Anders Ibsen claimed Tacoma’s economy is performing poorly, “Because people don’t have enough money to put in the economy to support our local businesses.”
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Ibsen is far from the only politician making this claim. Echoing the talking points of labor activists, politicians from Gov. Jay Inslee to President Obama have argued that a higher minimum wage will stimulate the economy and be good for businesses as low-income workers spend more money.
Unfortunately, there’s no theory or research to back it up.
Raising the minimum wage, by its very nature, simply redistributes existing resources. The money to pay higher wages either comes from customers, in the form of higher prices; from employers, in terms of lower profits; or, most regrettably, from other workers who lose their jobs or have their hours or benefits cut.
It’s true that, in aggregate, some low-income workers will spend more money if the minimum wage is increased. But for every extra dollar they spend, there is one less dollar of spending by someone else. Raising the minimum wage will no more stimulate the economy than a parent raising a child’s allowance will raise the family income.
Existing research on the subject shows that this redistribution of funds does nothing to help grow the economy overall, much less produce thriving local businesses. Indeed, recent research indicates that it eventually slows an economy by decreasing the rate of business formation.
A 2011 paper by researchers at the Chicago Federal Reserve found, unsurprisingly, that low-wage households increase their spending and take on debt in the wake of a minimum wage boost. Even though the researchers noted that their study is “silent about the aggregate effects of a minimum wage hike,” Obama administration officials have repeatedly cited the study as proof that a higher minimum wage will stimulate the economy.
Additionally, the same researchers have concluded in separate papers that raising the minimum wage decreases employment and increases prices. In a 2013 paper that took only employment losses and not price increases into account, the researchers concluded that a “minimum wage hike provides stimulus for a year or so, but serves as a drag on the economy beyond that.”
Other studies reach similar conclusions. A study by Joseph Sabia of San Diego State University published in January in Contemporary Economic Policy found that, “Minimum wage increases are associated with a reduction in state GDP (Gross Domestic Product) generated by lower-skilled industries” and concluded there is “little support for the claim that minimum wage increases provide a short-run economic stimulus.”
Minimum wage expert Professor David Neumark of the University of California-Irvine summed it up nicely when he pointed out “there is simply no evidence” to support the claim that raising the minimum wage stimulates the economy.
The laws of economics indicate that a $15 — or even $12, for that matter — minimum wage in Tacoma will not help local businesses or grow the city’s economy. One does not help a business by raising its costs.
But the rules of politics indicate that Tacomans will increasingly hear the argument repeated anyway as election day nears.
Maxford Nelsen is the labor policy analyst for the Freedom Foundation, an Olympia-based think tank. Doug Wills, Ph.D., is associate professor of economics at the University of Washington Tacoma’s Milgard School of Business.