Raising the Minimum Wage

 

Does it hurt the economy?

So...why mainstream economists say that if you increase the minimum wage it has a damaging effect on the economy, and why this isn't necessarily true...

Neoclassical economists would say that raising the minimum wage adds to the running costs of a business which increases the price of output. If the purchasing power of consumers is constant, that would mean that higher prices would lead to lower sales, and a slowdown in the economy.

But a heterodox economist would point out that the purchasing power of consumers in this instance is not constant. The majority of consumption is fuelled by wages, and the incomes of those consumers has increased. The workers buy more goods and services.

So unfortunately economic theory cannot provide a decisive answer.

"Economists are well aware of this conundrum: empirical correlation never proves causation. Causation itself is a deeply complex topic. While we can put together theory and models and data to make a case, we probably will not be able to prove that 'X causes Y' when it comes to the most significant questions in economics."

This is extremely frustrating for policy makers.

Which principle ends up guiding policy often comes down to who makes the stronger argument. But it is clear who wins and who looses in THIS debate. Businesses will always seek to reduce costs. Workers will always benefit from higher wages. There is a conflict of interest. Unfortunately the business lobbyist are a powerful force in politics, which is why we only hear one side of the debate.