The growing debate over raising the minimum wage, like many other recent political issues, is quickly getting bogged down by special interests and partisan politics. Very few politicians are grounding their stances on an understanding of macroeconomics. Rather, they're throwing around flimsy talking points that appeal to forces that influence their political futures.
Opponents argue that raising the minimum wage will harm the economy. It will make companies like McDonald's unprofitable and force them to layoff workers. They also say that the current wage is based on what the market will bear. That is, it's congruent with the skills required to do the job. Proponents, meanwhile, are using the issue to paint low wages as another example of the 1 percent messing with the 99 percent.
Both points of view are intellectually dishonest. Business owners aren't colluding to suppress the poor. They want to maintain the status quo because changing it would pressure them to rethink their business practices. The minimum wage isn't determined by the market; it's calculated by politicians, influenced by special interests, and mandated by law. There are no market forces at play here.
If we got rid of the minimum wage, whatever rate that emerged may actually be a product of the market, but the possibility for wage abuse would be too high. Prior to federal legislation mandating the minimum wage in 1938, workers were paid pennies an hour, far lower than what the market would bear.
Pegging the wage to some new politically calculated $15 per hour rate is also unrealistic. What is realistic is putting the minimum wage back in step with step with productivity: the ratio that measures inputs and outputs in production. This was the standard for minimum wage calculation prior to the early 1970s. Had the wage remained connected to productivity over the last 40 years, it would be $16.25 and hour today, a much better reflection of the market.
The economic benefits of returning to this model are significant. There would be some short-term shock to the system, which would put demands on businesses to accommodate higher labor costs. But over the long haul, the spending power of millions of workers would double. A huge amount of money would pour into the economy and consumer demand would drive job growth.
Numerous studies conducted by the Federal Reserve find that minimum wage increases boost GDP without a loss of jobs or inflation. Higher wages would also lower government spending on social services. Fewer people would need food, housing and energy assistance to supplement their income.
Raising the minimum wage is good policy, but it has to be done right. Otherwise, we'll be seeing a lot more happy meals getting stomped on by unhappy protesters outside McDonald's.