Minimum wage helps the consumption

In recent years, there has been growing interest in the role of minimum wages in improving the lives of low-paid workers, and also in rebalancing national economies. In China, coordinated minimum wage increases across provinces have been a key part of a strategy to reduce inequality and rebalance the economy, encouraging stronger domestic consumption in the face of falling export demand and reduced scope for investment-led growth. In the United Kingdom, where minimum wages were introduced at the beginning of the twentieth century, abolished in the 1980s and reinstated in the 1990s, a survey of political experts has identified the national minimum wage as a successful Government policy.

In the United States, a higher minimum wage has come to be seen by many as a way to reduce poverty and inequality and provide a stimulus to the economy with potentially favourable fiscal effects, including through reduced costs of anti-poverty programs and increased tax revenue. Minimum wages, if set and operated effectively, can help to reduce inequality and support aggregate demand by transferring resources to low-paid workers. This can have a positive effect on demand because low-paid workers have a greater tendency to consume goods and services with the increased wages.

Higher wages can also encourage investment since businesses will only invest if they anticipate increased demand from consumers. Higher income from minimum wages among the low- and middle-income groups can lead to a virtuous cycle of greater consumption and investment and also create more employment opportunities. Overall, the impact of a minimum wage depends not only on how it affects consumption and investment, but also on how it affects competitiveness and whether it affects net exports and, if so, by how much.

The strategy of raising the minimum wage may be more challenging for small, open and developing economies that derive most of their demand from abroad, if their exports are very sensitive to prices, that is, if they compete primarily on price rather than quality. In countries where domestic consumption is a large part of the economy or where export industries are moving up the value-added chain the environment is likely to be more permissive. An oft stated risk of raising minimum wages is the notion that it might hurt employment creation if it is set too high.

However, recent studies and surveys indicate that in most cases there are only small or no negative employment effects of minimum wages. For example, a review of 64 recent studies on the impacts of minimum wages in the United States concluded that there was little or no evidence of a negative employment impact.

As argued above, if minimum wages are set appropriately and operated effectively, then low paid wage earners will benefit. The transfer of resources to low-paid workers could contribute towards sustaining household consumption and overall aggregate demand and output, especially important during times of crisis.

The overall reading of the evidences on price effects, together with the evidence in the literature on wages and employment effects is that the minimum wage increases the wages of the poor, does not destroy too many jobs, and does not raise prices by too much. This conclusion is an important input to reconcile theory predictions of negative employment effect and the mixed empirical evidence of negative and non-negative employment effects in the literature.

But what are some effects for People Whose Income Would Rise? As a group of taxpayers, the workers whose income could rise because of a minimum-wage increase would consequently pay more in taxes and receive less in benefits. The largest part of that increase would consist of payroll taxes assessed for Social Security and Health insurance. The increase in earnings for some workers would also increase the amount that they owed in income taxes before refundable tax credits were taken into account, although almost all of them would owe no tax or be in one of the two lowest federal income tax brackets.

In addition, benefits from the EITC would fall for workers whose annual income was in the range where the credits decrease with income. In fact, all this does not happen all around, but could be if the policy will follow the minimum wage to tax more.