The minimum wage debate is happening thanks to more than three decades of stagnant inflation-adjusted minimum wage growth. The minimum wage limit has been raised 29 times since 1938 and saw largest cumulative increases to the rate happened in the 1950s.
BofA sees no real net benefits to raising the minimum wage when reviewing the literature on the matter. That does not prevent the bank from seeing benefits to offering more money to the lower income group. The thesis is that those in the lower income group have a high propensity to spend money.
The gain in income at the lower end of the income spectrum could be particularly powerful given the higher propensity to spend for this cohort.
The idea assumes lower income workers would see an increase in purchasing power which would in turn support consumer spending. Given that poor people tend to have more constrained budgets, BofA says there is a high propensity to spend relative to the average worker.
Even if there is some nitpicking to where, theoretically, we would see benefits to raising the minimum wage, we know the idea makes no economic sense and so does CA Government Brown. As we noted in April, CA Governor Brown admitted that raising the wage makes no economic sense.
"The irony of the situation, which will most certainly go under reported, is that even California’s Governor Brown knows that it’s not the right decision to make economically. Regarding the actual economic impact, California’s Governor Brown was quoted as saying that "economically, minimum wages may not make sense."
The math is simple though if you wish to believe.
According to BofA a $10.10 raise, on aggregate, would boost wage growth 0.01% to 0.02% over three year implementation period, supporting 16 million workers. A $12 would boost wage growth 0.2% to 0.4%, supporting 29 million workers over five year implementation period. Finally, a $15 would boost wage growth 1.0% to 1.2%, supporting 42 million workers over a five year implementation period.
We ran simulations based on three scenarios currently under review: $10.10 (HarkinMiller legislation proposed in 2014), $12.00 (Murray-Scott proposal) and $15.00 (which is being discussed on the campaign trail). We find that under a $10.10/hour minimum wage, aggregate wage growth would be boosted by 0.1-0.2pp if it were implemented over a three-year period, supporting approximately 16mn workers. By contrast, once fully phased in after five years, a $12/hour minimum wage would boost wage growth by 0.2%-0.4% and help as many as 29mn workers, and a $15/hour floor would result in a 1-1.2% acceleration and support up to 42mn people.
In the end, a minimum wage increase "would have a disproportionate impact on women and the young" while having a material drag on the leisure and hospitality industry. As BofA says:
An increase in the minimum wage would have a disproportionate impact on women and the young – about 63% of minimum wage earners are women and 45% are under the age of 25, based on the latest data from the Current Population Survey. However, on the other side, it would have the biggest drag on the leisure and hospitality industry, where about 15% of workers are paid at or below the floor. Conversely, in most other major industries minimum wage workers account for less than 2% of total hourly employed and no other industry has over 4%.
Beyond just raising the minimum wage rate, there is an impact to employment when employers are forced to give workers more money. A 10% rise in the minimum wage reduces employment by 2%:
Neumark and Washer (2007)1 did an extensive survey of over 100 studies and concluded that there was consistent evidence of job loss for low-skilled jobs. There is a wide range of estimates in the literature, but the consensus elasticity is about -0.2%. That implies that a 10% rise in the minimum wage reduces employment by 2%.
The academics remain mixed on the possible real impact of raising the minimum wage. As BofA said "the net benefit of raising the minimum is not clear based on the literature." Although we at Zero Hedge know quite well that any benefit we make ourselves believe through paper analysis will only result in very short lived, if any, benefit in the real world.
More money chasing goods raises prices and increases wages on the bottom will result in lose of employment because the higher paid employees will desire a proportionate increase to their pay also. It's quite simple.
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