The Washington Post has an interesting piece discussing the life of the low-wage workforce in small town Kansas. It also tells us of the problems that low-wage employers will face in paying the higher minimum. At one point it asserts that "most economists agree [that the proposed minimum wage hike] would cause a modest increase in national unemployment." I'm not sure how they have determined the views of most economists. There is a large body of recent research that indicates that modest increases in the minimum wage, like that being considered, have no measurable effect on unemployment. The wage increase is absorbed in lower profits and higher prices. Before anyone gets too concerned about inflation, as the article and an NPR piece I just heard warned, let's do some arithmetic. My friends at the Economic Policy Institute estimate that the proposed minimum wage hike will directly affect 5.6 million workers. If we assume that the average wage gain is $1.00 an hour (many of the affected workers earn only a small amount less than the new higher minimum wage), then this wage hike will increase costs by $11.2 billion directly. If we assume indirect effects of the same amount (workers earning above the minimum get wage hikes to preserve wage differentials), then the total cost is $22.4 billion. Now let's assume that one-third of this increase is offset by increased productivity (which could just mean reduced turnover), one-third by lower profits, and one-third by higher prices. This translates into a $7.5 billion increase in prices. In an economy with a GDP of more than $13 trillion, this will add about 0.05 percentage points to the price level. Before anyone gets too alarmed, remember this hike takes effect over 2 years. Our data is not accurate enough to pick up such a small impact on inflation.
--Dean Baker