Raising the Minimum Wage Is Only One Part of Boosting the Economy

"No one who works full-time should have to raise their children in poverty," Senator Barbara Boxer said. She was talking about raising the minimum wage during a speech to the Commonwealth Club of California. In addition to citing the moral reason the federal minimum wage deserves a second look, she also made an economic argument. "When working people have a little more in their paychecks, they spend a little more in their communities. So that's what we're trying to do," she added.

Boxer reminisced that during her childhood it was unheard of for people to work two jobs to make ends meet. Yet many Americans today face those circumstances. She added that the decline in America's middle class is a threat to our economy because our economy is consumer driven. If consumers lose purchasing power, our economy suffers. Amy Traub, senior policy analyst at Demos, a think tank in New York, agrees. "We have a lack of demand," which is causing the slow recovery, she said in a phone interview.

The movement to raise the minimum wage is gaining momentum. The president outlined his argument for raising the federal minimum wage in his State of the Union address in January and signed an executive order raising the minimum wage for federal contractors from $7.25 to $10.10. Even an unlikely source, tech billionaire and PayPal co-founder Peter Theil, seems to think that raising the minimum wage may not be such a bad idea.

Additionally, Gap, Inc. recently announced that the company and all of its brands will raise the minimum wage. Gap insists that raising the minimum wage is not a political move but a "strategic investment" that will have much greater returns through increased productivity and morale. Critics might suspect that the strategy for Gap is to take away attention from the negative press the company received by not signing a safety agreement that would hold companies financially accountable for safety measures in garment factories in Bangladesh. If that was the plan, it's working. President Obama applauded Gap's announcement, and the AFL-CIO labor federation is holding it up as an example for others to follow.

Yet economists and politicians remain divided on the subject. Arguments that government involvement with wages is unconstitutional and "Soviet-style," to the minimum wage being an ineffective way of helping those in poverty have been raised. Critics argue that raising the minimum wage means more cost to businesses and a loss of jobs. However, Gap's announcement was clear that though the company will raise the minimum wage, it will not reduce its workforce. A separate argument is that there are more targeted measures for helping those in poverty, such as raising the earned income tax credit. Christina Romer, an economics professor at UC Berkeley, noted in The New York Times that raising the earned income tax credit would be more useful and pro-business. Yet she added that it would also require more money to be spent, something that no one in gridlocked Washington wants to hear.

Traub thinks that the solution isn't a minimum wage increase at the expense of an increase in the earned income tax credit. "I think both could be strengthened, and we could be more effective in keeping people out of poverty," she said. She added that an earned income tax credit is a government subsidy that allows low-wage earners to survive. But implementing an increase in the earned income tax credit without an increase in minimum wage would let companies off the hook. "What we're saying is that the largest and most profitable companies shouldn't have to pay their employees enough to eat and put a roof over their heads," she said, "and instead, taxpayers should have to pay." That doesn't sit well with her. She added that the earned income tax credit needs to exist but should be complemented by a higher wage.

The Congressional Budget Office released a report on the consequences of increasing the minimum wage to $10.10. It estimates that though about 16.5 million low-wage workers will see their incomes rise, the raise will also cost 500,000 jobs. It also added that 900,000 people would no longer be living in poverty with the wage hike. Traub sees the loss of 500,000 jobs as a weakness in the CBO's report, noting that the CBO arrived at that number by taking data from other studies, instead of conducting one of its own. She added that studies that have examined neighboring states -- one that raised its minimum wage and its neighbor that didn't -- have not found job losses. "In those studies, overwhelmingly they don't find job losses, so I think that's sort of a red herring," she said.

According to the Bureau of Labor Statistics, 80 percent of those who earned a minimum wage or below in 2012 were 25 years or older. And 87.2 percent of those ages 16 and over who were making a minimum wage or below had a high school diploma or higher educational credentials. It is this population that would benefit from an increase in the minimum wage. The Economic Policy Institute, a think tank in Washington, D.C., conducted an analysis of the average minimum wage earner and found that they are on average 35 years old, more than half are women and work full time, and 44 percent have some college experience.

"The minimum wage is not a solution to every problem in the labor market," Traub added. The most recent data from the Bureau of Labor Statistics shows a 6.6 percent unemployment rate in January 2014 and 91.5 million people not in the labor force. An increase in the minimum wage won't help those who have been unemployed long-term. That's precisely why Traub thinks that it's crucial for Congress to extend unemployment benefits. "Getting people benefits again is both very important because it's a support for people looking for work and it keeps them spending," she said. "It's a connection between unemployment and minimum wage. It puts money in the hands of people who will spend it immediately."