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State Level Stimulus: Raising the Minimum Wage is Good for Jobs, Small Businesses

More than two years since the American Recovery and Reinvestment Act was passed, national news coverage of the U.S. economy is still doom and gloom. We have seen job growth stagnate for the past two months, state jobs cut, a federal deficit debate seemingly going nowhere, and unemployment rise to 9.2 percent in June. To make matters worse, employers are even discriminating against the currently unemployed in their hiring practices.

Unfortunately, the federal response to the continuously abysmal job numbers has ranged from the ineffectual to the counterproductive. President Obama is urging Congress to approve not one, but three trade agreements with the misguided belief that these agreements will boost exports and job growth regardless of the fact that states are still dealing with the job flight following NAFTA. Domestic policies seem to be heading in a similar direction as fiscal conservatives are pushing to sharply cut Congressional spending to our detriment.

Even in the off chance that any of these policies were effective, states do not have to wait for the federal government to jump start their local economies. States can be proactive, in spite of their revenue and budget problems, by instituting a proven economic stimulant at a low cost: a minimum wage increase.

As the Wall Street Journal recently reported, the main reason U.S. companies are not creating new jobs is the lack of consumer demand. People are just not spending enough money. How can states get their residents to spend more? By making sure they are earning more.

Studies of previous wage hikes demonstrate that when earnings increase, so does spending. The federal minimum wage increase in 2008, for example, provided a raise to an estimated two million workers, of which 500,000 supported at least one child. These raises translated directly to spending at no cost to the government. The federal minimum wage hikes in 2007 and 2008 resulted in a total of $4.9 billion in consumer spending, with an estimated additional $5.5 billion generated following the 2009 increase to the current rate of $7.25 per hour.

This increase is made possible by the increase in spending power that results from the wage hike. A minimum wage increase of just $1 generates $5 in spending power when making large purchases, such as cars. With car sales for 2011 on pace to be 28% below the sales during the 2001 recession, U.S. car companies should be begging states to raise the minimum wage.

And much to the chagrin of conservative pundits and business lobbyists, raising the minimum wage does not have the apocalyptic effects that they would have us believe. As two recent studies have shown, job losses do not occur following a minimum wage hike, even during times of economic downturns. A study on teen employment showed that the federal wage hikes did not hurt employment rates, but rather the impact was slightly positive even during periods of higher unemployment. Moreover, a study comparing neighboring counties with different minimum wages found that the increased earnings did not correlate to job loss.

Small businesses actually flourish in states with higher minimum wages. A report by the Fiscal Policy Institute shows that small businesses grew faster in states with minimum wages above the federal floor than other states at or below the federal minimum wage. Job growth was also faster in these states, especially in the retail trade sector, which is currently one of the largest industries creating jobs (specifically lower-wage jobs). The National Employment Law Project (NELP) found that, for those lucky enough to land a newly created job since private sector employment hit rock bottom in February 2010, nearly half have done so in lower-wage industries including retail.

Though eighteen states have a minimum wage above the federal floor, only six of those states have minimum wages of at least $1 over the federal rate of $7.25. Even worse, nine states either have minimum wages of $6.25 and under or none at all. Fortunately, ten states have taken action to address the constant devaluation of wages due to inflation, generally by making yearly adjustments to the minimum wage based on the consumer price index. However, even the highest state rate is still $1.71 less than the 1968 minimum wage, which at $1.60 would be equivalent to $10.38 today when adjusted for inflation.

State policymakers can continue to lead in this area and put some drive into this recovery at a low cost. Restoring the minimum wage can ignite the recovery in every state by fueling much needed consumer spending to the benefit of local businesses, workers, and economies.