Boosting the Minimum Wage: The Economic Stimulus That Isn’t

The labor union-backed Economic Policy Institute recently released an update of their earlier “analysis” on a $10.10 minimum wage. EcPI’s analysts have scaled their earlier claim of $32 billion in stimulus back by a cool $10 billion or so, but — in their view — a nearly 40 percent hike in the minimum wage is still a big boost for the US economy.

Across the phase-in period of the increase, GDP would grow by about $22 billion, resulting in the creation of roughly 85,000 net new jobs over that period.

EcPI’s claim here is so far outside the mainstream that not even ideologically-aligned economists will get behind it. And rightly so: Economic research from an economist at San Diego State University found no link between a higher minimum wage and economic growth. Even the Federal Reserve Bank of Chicago analysis that advocates rely on to make their case finds “compelling” evidence that a wage hike reduces employment and admits that a higher minimum wage would be a long-term drag on economic growth.

It’s worth taking a closer look at how EcPI arrived at its numbers to appreciate just how absurd the study is. The Institute ignores the well-established fact that income and jobs are lost following a wage hike, and instead cobbles together a “multiplier” which (it claims) is associated with a minimum wage increase. EcPI multiplies the total increase in wages by the multiplier, and — voila! — it finds an economic boost of $22 billion.

This magic math works for any level of minimum wage increase. For instance, if the minimum wage rose to $20 an hour and the estimated wage bill quadrupled, EcPI’s model would show a greater than $150 billion economic boost for the US, with over one million new jobs created. Growing the economy – it’s so easy, even a caveman can do it!

Of course, in the real world, no economist would seriously claim that a $20 minimum wage would be a net positive for the economy, and even a $15 minimum has made the most liberal of economists uneasy. This “math” only works in the fact-free world of a labor-backed think tank.