Increases in minimum wage boost consumer spending

Economic Snapshot for May 27, 2009

By Kai Filion

The recently enacted American Recovery and Reinvestment Act included policies to help struggling families and create jobs. But an extremely effective and simple policy that achieves both of these goals is often overlooked: increases in the minimum wage. Each increase provides financial relief directly to minimum wage workers and their families and helps stimulate the economy. By increasing families’ take-home pay, workers gain both financial security and an increased ability to purchase goods and services, thus creating jobs for other Americans.

A three-step federal minimum wage increase was passed by Congress in 2007. The first step took place in July of 2007, with a year between each step. In a forthcoming paper, we estimate the total impact of each increase using results from a study by economists at the Federal Reserve Bank of Chicago (Aaronson et al. 2008) that measures the effect of minimum wage increases on spending. The first two increases in July 2007 and July 2008 will have generated an estimated $4.9 billion of spending by July 2009, precisely when our economy needs it the most (see Figure). Furthermore, the final increase in July 2009 is expected to generate another $5.5 billion over the following year. The paper also shows that if the minimum wage were increased to $9.50 in 2011, as President Obama promised during the election, an estimated $60 billion of additional spending would be generated over two years.¹

These results demonstrate that an increase in the minimum wage would not only benefit low-income working families, but it would also provide a boost to consumer spending and the broader economy.

Reference
Aaronson, Daniel, Sumit Agarwal, and Eric French. 2008. The Spending and Debt Response to Minimum Wage Hikes. Working Paper. Chicago, Ill: Federal Reserve of Chicago.

Note
1. This assumes a two-step increase, first to $8.25, then to $9.50 a year later.