Increasing the Federal Minimum Wage

February 23, 2013

According to the Labor Department, the purchasing power of the federal minimum wage, after adjusting for inflation, has dropped twenty percent (20%) since 1967.

At some level, higher minimum wages may cause job losses, but available data indicate this is unlikely to occur with an increase from $7.25 to $9.00 (about $18,000 per year). The bad news: making ends meet is still difficult; the good: such increased wages are spent locally, and right away. Given the multiplier effect and velocity of money, positive things happen to an economy when it is fed from the bottom up.

Since states are permitted to set minimum wages higher than the federal rate, where state differences are significant they create laboratories at shared borders. In 2007, while Idaho was content with the federal minimum wage of $5.15, the state of Washington had the highest minimum wage in the country at $8.00. Noting this discrepancy, critics of higher minimum wages declared confidently that the economy of Spokane Valley, Washington, would suffer when compared to Post Falls, Idaho, just 8 miles away.

The New York Times examined the two communities on either side of the border and determined it was the economy in Washington that prospered (NYTimes, 2/14/2013). Although prices did rise on the Washington side, the higher wages led to increased spending, which “floated more boats” than the more austere approach in Idaho. Facts are stubborn creatures, and public policy should be based on them.

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