With Friends Like These….

by Don Boudreaux on January 3, 2015

in Seen and Unseen, Work

Here’s a letter to a new e-mail correspondent who assumes that, because businesses now have lots of cash in reserves, any increase in the minimum wage will simply be funded out of these reserves:

Mr. or Ms. Workers Friend
Bryn Mawr, PA

Dear Mr. or Ms. Friend:

You claim that my argument against the minimum wage is “wrong” because it ignores the increased, economically stimulative spending caused by a higher minimum wage­.  You then anticipate and reject one argument against your claim: “Corporations are now stashing away profits and not spending them….  So, raising the [minimum] wage would boost total economy wide spending given that it will not crowd out spending by employers/businesses/corporations.”

I disagree.

First, you assume that a higher minimum wage means more total income for workers.  This assumption might be correct, but it isn’t necessarily so: if raising the minimum wage causes the number of hours of minimum-wage work hired by firms to fall by a greater percentage than is the percentage increase in the minimum wage, then the total income received by minimum-wage workers will fall rather than rise.  (Total spending by workers will, then, presumably also fall rather than rise.)  A review of the chapter on elasticity in any principles-of-microeconomics textbook will give you deeper insight into this point.

Second, even if hiking the minimum wage does increase the total amount of income employers pay to workers, this fact doesn’t mean that spending will rise in total.  Businesses obliged to pay more for labor do not have to do so out of cash reserves; they can instead reduce spending on other fronts.  If, as you say, businesses are stashing away unusually large amounts of cash, rather than investing these funds, there must be a reason.  I believe the reason is that businesses are wary of the current intrusive tax and regulatory regime.  Raising the minimum wage will only make businesses more wary.  Therefore, whatever increased consumer spending results from a higher minimum wage is indeed likely to be offset – perhaps even more than offset – by decreased investment spending by businesses.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030


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