I just came across this plea to raise the minimum wage (nestled into a post telling Obama what he needs to do in response to the current political crisis over the debt limit):
Add a buck to the federal minimum wage. Most major corporations are sitting on cash, cash they won’t spend on expansion or hiring because they see no demand. 72 million Americans make minimum wage. An extra buck an hour would mean they would gross $2,000 more each year, most of which they would take home and spend. It would end up as an annual $125 billion demand for goods and services. Of course, even people who don’t earn minimum wage would tend to get their hourly lifted. Demand and spending raises both employment and tax revenue. Again, CEOs will scream and the GOP will wail, but ordinary Americans will say, “Yeah, I could use $2,000.”
First of all, the claim that 72 million Americans (which is like half of the employed population) make minimum wage is off by an order of magnitude. The Bureau of Labor Statistics puts the number at 3.6 million in 2009. This means that the $125 billion in stimulative impact of raising the minimum wage would also be an order of magnitude lower.
But numbers aside, this is a counter-productive solution to our current economic problems. Because of the law of demand, raising the minimum wage won’t just result in minimum-wage workers getting paid more; it will cause employment of minimum-wage workers to drop, since, ceteris paribus, people/firms will buy less of something when its price increases.
Casey Mulligan argued recently that the last minimum wage increase (in 2009) cost the United States 800,000 jobs. This may be overstating the damage, but I have trouble imagining that the increase didn’t increase unemployment at least to some degree. There must be some number of American workers who are profitable to hire at five or six dollars an hour but who are not profitable to hire at $7.25. The record low in employment this summer among teens (25%!) is further evidence that our minimum wage has made it illegal for lower-skilled workers to work at their marginal value.