An important thing to consider when talking about an increase in the minimum wage is the elasticity of demand for labor–in layman’s terms, how much demand for labor falls when wages go up. Take an example: demand for gasoline, in the short term, is fairly inelastic; if gas prices shoot up, consumption will fall a little but not that much, so overall spending on gas increases. Candy bars, on the other hand, are fairly elastic in demand. If the price of my Snickers doubles, I’m not going to consume half as many candy bars, I’m going to consume no candy bars. I can get my chocolate elsewhere.
In evaluating a wage hike, it’s helpful to know whether demand for labor is elastic or inelastic, because that will determine whether overall spending on unskilled labor will increase or decrease.Â Now, a few weeks ago,Â Dean BakerÂ suggested that labor demand was inelastic, and that a minimum wage increase would therefore increase total spending on unskilled labor. HeÂ went on to make a foolish point, but that doesn’t mean that the overall increase in spending isn’t an interesting outcome.
Here’s why: an increase in the minimum wage represents a redistribution from employers to employees, or from higher income households to lower income households. Given that lower income households save less than higher income households (and would, in all likelihood, spend close to 100% of the increase in take-home pay), an increase in the minimum wage that led to an increase in labor spending would therefore generate an increase in total consumption across the economy, other things equal. If the effect was big enough, that increase in consumption could provide enough of a boost to the economy to offset some of the job loss inflicted by the wage increase. It might also boost retail sales enough to make some employers favor an increase. So there’s another reason a minimum wage increase might not be completely bad for employment. Might. It’s important to remember that the economy is a fairly complicated system with many different feedback loops. This is merely one potential outcome.