Will the new $7.25 federal minimum wage boost U.S. GDP?

Posted Aug 1st 2009 2:40PM by Joseph Lazzaro
Filed under: Forecasts, Employees, Federal Reserve, Recession

The new $7.25 federal minimum wage took effect this week, and with it came concerns -- not unreasonably -- that the new rate risks increasing inflation in the United States.

A second side-effect concerns the higher cost it will impose on businesses, particularly small ones, in a recession, typically during a time of lower revenue/sales: it's a prescription that could squeeze selected business model bottom lines.

The Fed on the watch

And, to be sure, the U.S. Federal Reserve will be monitoring prices and costs to see if the higher minimum wage is creating inflation havoc at a time when U.S. businesses least need another concern to deal with. Businesses have enough to worry about; and some are struggling just to maintain operations for another quarter or two -- the recession has been that damaging.

But the Fed will also be looking for signs of another side-effect, and this one is a positive one: a GDP boost. That's because millions of workers are going to get a raise that they otherwise would not have gotten, and that will increase their purchasing power.

The significance? Some of those increased-pay workers will choose to spend -- perhaps buying a washer or drier, making a down payment on a used car, or paying down a debt. It's quite possible -- although in these "frugal consumer" economic times no one is certain- - that the wage hike will increase U.S. GDP, serving as a small engine of growth as the U.S. economy inches back toward health.

And if the Fed and other organizations can verify that the minimum wage increase has boosted GDP without a loss of jobs, or inflation, Congress may to consider another decision in the quarters ahead: a decision to raise the federal minimum wage again, this time to $8.25 per hour.

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Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.

Tags: 7.25 minimum wage, consumer spending, Federal Reserve, inflation, inthenews, minimum wage, recession

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Reader Comments (Page 1 of 1)

8-01-2009 @ 5:41PM

paul34 said...

>> That's because millions of workers are going to get a raise that they otherwise would not have gotten, and that will increase their purchasing power.

And people who were making more than the minimum wage are now less ahead of that. Eventually it will reduce their purchasing power as well.

I'm surprised that a financial website isn't aware of econ 101 and the folly of the minimum wage.

8-01-2009 @ 6:39PM

Iridium said...

The increase in minimum wage has already increased inflation. At the local mall food court every single fodd item has gone up in price over the past week.

A small milkshake at ChickFilA was $3.25 before the wage hike and it is now $3.85. Similar food items like a Antie Annie's pretzel has gone up by $.50.

Three years ago a Big Mac meal at McDonald's was $3.85 at nearly every restaurant. It went up to $5.23 this year until the $4.00 meal promotion. After this promotion the meal will prbably return to a price above $5.

Every time minimum wage is increased the cost of the lowest rung goods increases as well. You know the area of products that makes up the highest percentage of purchases by people who make minimum wage. Thereby reducing thier purchasing power and negating the wage increase.

As for everyone else we see small ammounts of inflation that do not seem to be that bad but added together become a major problem. It is nice that the redaings of inflation often discount things like food and energy. Two things that are directly tied to small increses due to base costs. That box of cereal is going to cost more due to the hike in minimum wage. Multiply that by a few boxes a week for 52 weeks and it hits a family hard.

SO by a measure of gross GDP the boost in minimum wage will increase GDP but only because everything will be more expensive. Not because people are purchasing more products.

We've had growth through cost cutting and now we can have growth through inflation. Any other great things this government and economy can throw at us?

8-01-2009 @ 7:16PM

SaintStryfe said...

Seriously, you're asking this on a stock blog? Full of self-righteous people who side with Mr. Bumble over Oliver Twist?

Give the minimum wage a boost, people spend it. Give the rich a tax cut they hoard it. Given the two, I'd rather give the minimum wage a boost.

8-01-2009 @ 7:31PM

ij70 said...

SaintS, rich people don't hoard money. They are rich, they do not need to hoard.

The hoarders are the $ 40k+ crowd, also known as middle class, you know... engineers, pharmacists, nurses, walgreen store managers. They hoard because their government just made their work force more expansive, their profits just got smaller.