What Would The Federal Reserve Do If Retail Wages Surged?

November 19, 2012 | | Slate |

Catherine Ruetschlin has produced an outside-the-box policy brief for Demos arguing for "a new wage floor for the lowest-paid retail workers equivalent to $25,000 per year for a full-time, year-round retail worker at the nation’s largest retail companies—those employing at least 1,000 workers."

Conventional thinking would say this would result in massive job losses, but she argues that we should actually see it as a form of fiscal stimulus:

The economy would grow and 100,000 or more new jobs would be created. Families living in or near poverty spend close to 100 percent of their income just to meet their basic needs, so when they receive an extra dollar in pay, they spend it on goods or services that were out of reach before. This ongoing unmet need makes low-income households more likely to spend new earnings immediately – channeling any addition to their income right back into the economy, creating growth and jobs. This “multiplier effect” means that a higher wage standard for retail workers will also generate new jobs. Our estimates of the job creation effect are derived from widely accepted multipliers on consumer spending. It includes the benefits of a raise on disposable income and accounts for the impact of any additional costs to the firm and the potential for businesses to pass-through the cost of decent wages onto their customers through higher prices.

You can model the impact of the higher wages on profits and consumer prices in different ways, but she concludes that if firms engaged in 100 percent consumer pass-through of the costs it would amount to a one percent increase in retail prices.