There Is No “Trickle Up” Effect Caused By The Minimum Wage

09 Jan, 2007 by John Hawkins

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Over at the Huffington Post, Steven Hill has written a backwards and ill-informed economic argument for the minimum wage. Here are the lowlights:

“Recent proposals call for increasing the current federal minimum wage of $5.15 an hour — the lowest minimum wage in inflation-adjusted dollars in more than 50 years — to $7.25 an hour. According to the Economic Policy Institute, an estimated 14.9 million American workers would benefit from an increase in the federal minimum wage — 6.6 million who currently earn less than $7.25 an hour, and 8.3 million who are likely to receive raises due to the spillover effect of a minimum wage increase. Over half of these workers work full-time, and another third work between 20 and 34 hours per week.

Assuming a minimum wage increase raises earnings for those employees by an average of one dollar per working hour each year, we’re talking about a net increase in purchasing power of well over $15 billion annually being pumped into the economy. Those are the kinds of numbers Henry Ford understood.

In other words, raising the minimum wage will positively impact the entire American economy, not just low-wage earners. From a macroeconomic point of view, if low wage workers have more money to buy things, then businesses selling their products and services will have more customers. And more customers will mean greater sales, higher profit, and a “trickle up” effect that creates a more robust economy.”

…Republicans and business leaders will counter that the minimum wage increase will lead to fewer entry-level and low-skilled jobs, and also to higher prices for goods and services as the cost of the wage increase is passed along to the price of a hamburger at McDonalds. They will paint support for a minimum wage increase as yet another example of Democrats trying to help the undeserving poor at the expense of middle class consumers.

Yet a broad swath of the middle class can easily understand how giving low-wage workers more money in their pockets will result in a lot more money being pumped into the economy. Moreover the Republicans can’t dispute this impact of a minimum wage increase because it is precisely this “trickle up” phenomenon they have pointed to for the past several years to justify the Bush administration’s massive tax cuts.

Look, if there were such a thing as a “trickle up” phenomenon, then we’d be better off making the minimum wage a thousand dollars an hour, wouldn’t we? That would really cause the wealth to “trickle up,” wouldn’t it?

Here’s the problem with that sort of thinking: the money to pay the minimum wage won’t come from a magic hat, it’ll be added to the price of the product and paid by consumers who could have spent their money on other goods. So, in order to pay Joe Smith more money than he’s worth via a minimum wage, customers will have to buy less of other products, that were probably made by efficient companies that aren’t overpaying their workers — and making our economy less efficient doesn’t help the economy. In fact, to the contrary, the more efficient the economy is, the more wealth it creates.

Now, is upping the minimum wage going to cause major economic damage? Probably not, although it will certainly decrease the number of jobs available as businesses attempt to find a way to get their money’s worth for their labor. For that reason alone, it should be opposed.

PS: Another way of looking at this is as a variation on the “broken window fallacy.” Here’s John Stossel running it down:

“In a small town, an idiot breaks a shop window. He’s called a vandal, until someone points out that a window installer now must be paid to replace the window. The window installer then will have enough money to buy a new suit. A tailor will then be able to buy a new desk. And so on. The whole town apparently gains from the economic activity generated by the broken window. Of course, if this made sense, cities should hire people to run though town, breaking windows.

But it doesn’t make sense. It’s a fallacy because the circulating money is seen; what is not seen is what would have been done with the money if the window were still whole. The shopkeeper, instead of paying the window installer, might have expanded his business, or bought a new suit or a new desk. The town is worse off because of a broken window.”

Instead of a window installer getting extra money, we’re going to be giving the extra money to people doing menial, entry level jobs. But, the principle is the same.

Update #1: From the comments section:

Real life here. I plopped down $215,000 to buy Tumbleweeds Bar and Grill. If the minimum wage is increased I’ll have to lay off all my hostesses. I don’t believe liberals have ever had to make payroll. My business has to gross $78,000 a month just for me to take home $700 a week. Since we’re always teetering on that number an increase in the minimum wage would hurt me bad. Unless of course libs think I’m rich with my salary of $36,400 take home pay a year.

I don’t think they have any idea how much us small businesses are already taxed, retail sales tax alone is over $5,000 a month. I have to match all 34 of my employees taxes which is around $3,800 every two weeks.

I’d like to hear from the libs why, since I took all the financial risks am I supposed to make less money? If this minimum wage increase is signed into law there will be 7 college/high school girls out of a job at my place.” — Capitalist_Infidel