Nations Agenda™ - Constructive Political Thought
Informative articles and commentaries on government, economics, climate change, our times
Millennials, Seize the Future or Lose It All
Part 9 - The Impact Of A Dollar

What does it mean to people and the community when dollars are added to the economy through programs like Unemployment Insurance?

A study done by the Bush Administration found that:

  • For every dollar spent on unemployment benefits, two dollars are pumped back into the economy.
  • The Council of Economic Advisors estimates that in 2009 and 2010, GDP was boosted by 0.8% and 800,000 more jobs were created as a result of unemployment benefits for the long-term unemployed.
  • According to the Census Bureau estimates, unemployment insurance kept 3.2 million Americans from falling below the poverty line in 2010 alone.
  • Source: The Economic Impact of Unemployment Insurance - US Department of Labor

Despite the fact that a few people will take endless advantage of unemployment insurance (most won't), it not only has a multiplier effect of 2x in the community, it boosts GDP, it creates jobs, it keeps people off of government assistance.

That's a great story. The even bigger story here is that, when you add a dollar to the economy, it has a multiplier effect, not just in dollars, but in many ways that are very beneficial to the economy.

In studying four Eastern (Tiger) economies, Lazonick shows that rising wages were integral to the dynamics of economic growth. "...The emergence of ever more remunerative high-tech employment opportunities may be both cause and effect of sustained economic growth." Sustainable Prosperity in the New Economy? by Peter Lazonick.

Seattle's experiment with raising the minimum wage to $15.00 didn't create a catastrophe. Unemployment there fell at the same rate as overall US unemployment. We Are Seeing The Effects Of Seattle's $15 An Hour Minimum Wage.

While simplistic math really doesn't show that raising the minimum wage has much effect on the economy, as shown by The Facts On Increasing The Minimum Wage, and confirmed by my own calculations, this overlooks a host of factors.

Simplistic math on raising minimum wage overlooks:

  • It does have some impact.
  • The multiplier effect of 2x in the local economy.
  • The removal of people from government dependence.

The Congressional Budget Office looked at the impact of a $9 to 10.00 increase in the minimum wage. They concluded that it might reduce total employment by .3%, increase a small number of jobs  due to increased demand, and positively effect 95% of people. Other studies found that a gradual increase to $10.10 by 2016 would increase wages by $35 billion, which would boost GDP growth by about $22 billion. - What Really Happens When You Raise The Minimum Wage

The Federal Reserve has done recent studies on the impact of rising wages, especially considering inflation. What they  found is that "price inflation now responds less persistently to changes in real activity or costs; at the same time, the joint dynamics of inflation and compensation no longer manifest the type of wage–price spiral that was evident in earlier decades." The Pass through of Labor Costs to Price Inflation

Germany, which has had an excellent economy and policy decisions that have supported a world class economy, has looked at the potential effect of raising all German wages. "...rising wages should eventually spur higher consumer spending, more imports and a smaller trade surplus. All that would benefit the eurozone and help the global economy." Germany’s Rising Wages Bode Well for Global Economy - WSJ

Studies of the City of Los Angeles raising the minimum wage to $13.25, concluded that "the benefits of raising the minimum wage will outweigh the costs. " - Raising the minimum wage in LA: 3 studies on the impact

What is the actual impact of wages on prices? Do rising wages make products affordable? 

The fear spread by many is that rising wages will price products out of consumers' reach, and possibly cause inflation.

"...a 10 percent increase in the minimum wage resulted in a 0.4–0.7 percent increase in restaurant prices. Much of the increase occurred within the first month of the wage hike. In the fast food sector, prices rise 1.5 percent in response to a 10 percent increase." - Output Prices and the Minimum Wage, Economic Policy Institute

So essentially it's around a 1.5:10 ratio. Barely significant.

In the fast food industry, one study found that raising the minimum wage to $12.00 would raise the price of a hamburger around .12 cents. In another study, "...a $10 minimum wage would cost consumers about a dime more per dollar spent and a $15 minimum wage, or more than doubling pay, would cost about $0.27 more per dollar." - What Will a Minimum Wage Increase Cost You at McDonald's?

Wages are a significant part of the price of a product, but prices don't go up 1 to 1 in proportion to wages. The proportion of wages to prices is different in every industry, but take, for example, the cost of manufacturing or construction. Wages are typically around half the cost of manufacturing or constructing. On top of that you add the cost of company overhead, which may be the same price as manufacturing. You may have marketing, transportation, and advertising costs on top of that. Add to that profit, which may 5 to 15%, and then taxes, which may run around 15% of profit.

Note that the figures above are accurate, but when wages go up, some benefits also go up, such as the company contribution to retirement. Benefits are typically 30% of wages. In some cases, such as workers below 40 hours a week, benefits are minimal.

For products sold in retail, a markup of 2x to 10x may occur.

So basically the cost of wages is ~25 - 32.5% of the cost of getting the product to market, in manufacturing and construction.  For a $100.00 product, if wages go up 2%, the price  goes up .50 - 66 cents. If the product is sold through a retailer, the price may go up $1.00 to $5.00.

These figures will vary considerably, depend on the industry. Wage increases affect other sectors as well, such as transportation and marketing. But what the figures show is that normal wage increases do not lead to huge increases in prices, or in inflation. But wage increases have a big impact on wage earners and the economy.

Companies don't exist in a microcosm. A more complete picture of overall wage increases in an economy, is that it eventually affects every part of the process. Companies may pay more for raw material and components due to increases in supplier labor costs. Overhead costs go up as administration and supplier wages increase. Benefit costs go up as medical costs and other administration costs go up. But it still isn't a 1:1 ratio. It's certainly better than the declining wages we are seeing now.

Companies compete for employees. When one company raises wages, others are likely to, to retain good employees. Increasing wages, if incremental, is healthy and doesn't create an inflationary spiral. More money in consumers pockets means more purchases from companies.

Consumer spending accounts for roughly 70 percent of the domestic economy. Increased wages increase spending and the demand for goods.

Austerity is a self-fulfilling prophecy. While many politicians like the idea of driving the economy down to get rid of social programs they don't like, austerity is a downward spiral that hurts everyone.

Boosting wages has a huge positive impact on the overall economy.