According to Keynesian economic theory, an injection of funds into an economy will generate a multiple increase in overall economic activity. My colleague, Dick Schiming, was quoted a month ago by the local television station:
And later in the story.
So if you take the basic identity GDP = C+I+G+NX (spending on economic output is the sum of consumption, investment, government spending, and net exports), Dick is arguing the minimum wage will increase C.
And it's not just Dr. Schiming making this argument (see here). So, I ask them this: why not set the minimum wage at $100 per hour?
A common finding in minimum wage studies is that the elasticity of demand for minimum wage workers is somewhere around -0.1 in the short run. That is, a 10% increase in the minimum wage causes a 1% decrease in employment. When demand is inelastic and the minimum wage increases, minimum wage workers as a group will realize higher incomes in the short run although some members of the group will have lower incomes.
The problem with Dick's argument is that increased wage payments from businesses do not represent an injection of funds into an economy. Think of it this way. If I take the money out of my left pocket and put it in my right pocket, do I have more money in my pockets? No. I haven't changed the stock of cash in my pockets, only its distribution. Likewise, the minimum wage workers will have more money, but business owners will have less money.
So while that part of C driven by minimum wage workers is likely to increase, it will be offset by a likely decrease in that part of C driven by business owners and a decrease in business investment, I.
For a policy to be truly stimulating, it needs to encourage more voluntary trades. Increases in the minimum wage causes unemployment. That is, it discourages voluntary trades in the low skilled labor market. Moreover, to the extent that an increase in the minimum wage increase prices of goods/services produced by minimum wage workers, it discourages voluntary trades of consumables.