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The Minimum Wage “Tax and Transfer”

Catherine Ruetschlin

Since everyone knows that the real Fed hippies are in DC, a paper from the Chicago Fed highlighting the benefits of raising the minimum wage provides the argument with some conformist cred. According to economists David Aaronson and Eric French, Obama’s proposed minimum wage hike to $9 an hour would boost economic activity by 0.3 percent in the year following the raise, a stimulus that amounts to $48 billion.  Their estimate is based on the multiplier effect of putting dollars in the hands of those most likely to spend them, a group, they argue, which includes 22 million low wage workers today.

It is not a new idea. Last fall, I authored the report Retail’s Hidden Potential: how raising wages would benefit workers, the industry, and the overall economy, which makes the case for paying full-time retail workers $25,000 per year. Like the Federal Reserve, the Demos paper found that net spending gains would outweigh any negative impacts of a raise and generate new GDP, which translates to new jobs. 

In fact, my calculations were conservative, given that a 2011 study by Aaronson, French, and another Federal Reserve economist showed that low income households would spend more than 100 percent of the wage increase as they leveraged their new income toward investing in durable goods like automobiles. With more workers affected in the new minimum wage study and a greater estimated propensity to consume, the $48 billion stimulus packs quite an economic punch.

As conservatives like to point out, price increases can counteract the rise in spending associated with a minimum wage. But the Demos study shows that the average shopper would spend just an additional 15 cents per shopping trip, or less than $18 per year, an amount that is more than compensated by the additional wages in workers’ wallets. The Fed paper reaches the same conclusion. As Aaronson and French write:

“We view the minimum wage as essentially a “tax and transfer” program. Firms that have to pay higher wages to their workers respond by raising prices on their goods and services. Higher prices on goods and services offset the income benefit for minimum wage workers and reduce the real income of non-minimum wage workers who did not get a wage increase. Still, an increase in aggregate household spending can arise if minimum wage workers have a higher propensity to spend — particularly in the short run — than non-minimum-wage workers.”

The “tax and transfer” part of the Federal Reserve’s take on the minimum wage dubs consumer spending a “tax” where the prices reflect the actual cost of production and sales. But the current low minimum wage is a tax a transfer program in the literal sense – with the transfers going from taxpayers to the richest corporations in the country.

It costs money to maintain a labor force, since there is a cost associated with ensuring that each worker can meet her basic needs and show up for a shift of being a productive, content, and healthy laborer. Right now that cost is covered by American taxpayers in a big way. Companies like Walmart, Target, and Home Depot in retail, and McDonald’s and YUM! Brands (which owns KFC, Pizza Hut, and Taco Bell) in food service, shift the cost of maintaining a labor force to society as they pay poverty level wages that force workers to rely on public programs for basic needs even though they are working full time.

New data from Massachusetts and Missouri give us a dollar figure for just how much we transfer into the pockets of big employers by allowing them to pay their workers $7.25 per hour. In both states Walmart racked up the most generous public support, charging $14.6 million to the health care safety net in Massachusetts and $6.2 million in Missouri. Back in May, the House Committee on Education and the Workforce used data from Wisconsin to estimate a cost of $900,000 in taxpayer subsidies for every single Walmart Supercenter location.

A raise for the lowest earners will put money in people’s pockets, boost economic activity and lead to new jobs and a larger GDP. And all at the low low price of just 15 cents per shopping trip. The current standard drags down consumer spending, leaves hard working Americans struggling below the poverty line, and costs us millions of dollars per year. If we have to “tax and transfer,” let’s get more bang for the buck by putting the money in the hands of people who need it most. That’s how an efficient tax system works.