At the American Prospect, venture capitalist and inequality foe Nick Hanauer argues that government inaction on the minimum wage has helped create a low-paying “parasite economy” that is holding back national growth. Hanauer’s parasite economy includes large multinational corporations like Wal-Mart and McDonald’s that pay their workers less than a living wage, counting on government safety net benefits to keep their employees afloat.
These firms are “parasites” in that they extract wealth from the consumer economy without giving their workers the means to truly participate in it. “[L]ow-wage workers at parasite companies,” Hanauer writes, “cannot afford to robustly consume our products, or most anybody else’s, in return. The parasite economy is simply bad for business.”
By paying employees meager wages, parasite companies depress overall growth by refusing to provide the kind of disposable income their workers need to stimulate the economy. But Hanauer doesn’t condemn the parasite companies; indeed, he owns up to being a parasite company owner, too. Hanauer and business owners like him fear that taking on added costs like higher employee wages will undercut their company’s ability to compete in the cutthroat marketplace and maintain market share.
The parasite economy—firms caught in a race to the bottom of the pay scale—is one big collective action problem. We’d all be better off if the parasite companies paid higher wages, including those companies themselves: their employees could take their higher wages to purchase more consumer goods and grow the economy. But it’s a dangerous business move for any one firm to raise wages unilaterally.
Hanauer’s solution to this collective action problem is centralized action by Congress to gradually raise the minimum wage. “[W]hen we lift wages through reasonable increases in the minimum wage,” Hanauer argues, “everyone prospers[.]” All firms take the same financial hit, so no one firm is disadvantaged. And importantly, more money in employees’ pockets produces greater economic growth, lifting the revenue of these very firms.
Hanauer’s argument hinges on this last point: that raising the wage provides a stimulus for economic growth. It’s an argument he has made before — that a higher minimum wage is good for business because “[r]aising the earnings of all American workers would provide all businesses with more customers with more to spend.” It’s also the argument that some smaller, lower-cost cities and towns have been banking on in California in anticipation of a statewide $15 minimum wage: that the higher cost of employees would be offset by a boon in economic growth from new disposable income and, in turn, new business.
But is it true? This kind of idea has a long history as a theory, going back to Adam Smith’s Wealth of Nations. As Jeff Madrick has noted, Smith “asserted that a large market for goods and services was critical for growth,” meaning that growth depends on maintaining sufficient consumer demand. And Keynesian economics has long believed that higher rates of growth can be achieved by stimulating demand.
But what about a minimum wage increase in particular? A 2011 study by economists Daniel Aaronson and Eric French at the Chicago Bank of the Federal Reserve found that a rise in the minimum wage does have notable effects on consumer spending. “[A] $1 minimum wage hike,” the economists found, “increases household income by roughly $250 and spending by approximately $700 per quarter in the year following a minimum wage hike.” When workers have more money in their pockets, they become more comfortable investing in durable goods like automobiles.
True, minimum wage hikes can have other negative effects, like eliminating jobs. But economists are generally split on whether raising the pay of workers really causes companies to cut jobs and hiring. Even though there is little evidence that raising the minimum wage has a definitively negative effect on employment, the prospect of job loss still led Aaron and French to temper their prognosis for a minimum wage-fueled growth boon. “[W]e should be somewhat suspicious of claims that the minimum wage will significantly boost the economy,” they conclude, while nonetheless finding “compelling evidence that putting money into the hands of consumers, especially low-income consumers, leads to predictable increases in spending.”
It makes intuitive economic sense that a rise in income for minimum wage workers will boost aggregate demand and, thus, increase growth. This is especially plausible given that low-wage workers have the highest tendency to spend any additional pay they take home. This fits comfortably with the liberal emphasis on middle-out economics: that growth is generated by consumer spending from a strong, broad middle class.
A livable minimum wage has other clear advantages, too. Hanauer’s parasite firms are essentially public-private partnerships, counting on public benefits like SNAP and the EITC to top off employee’s sub-livable paychecks. (Indeed, Hanauer notes that McDonald’s even maintained an employee hotline called “McResources” to guide workers through social assistance options.) Research shows that raising the minimum wage produces safety net savings by shifting the cost of guaranteeing a living wage from the government to employers. Researchers at the Economic Policy Institute found that with a $10.10 minimum wage, 1.7 million fewer Americans would rely on public assistance programs, saving the government (conservatively) nearly $8 billion each year. A higher minimum wage would thus mandate corporate responsibility from employers while promoting fiscal responsibility from the government.
Even though Hanauer’s minimum-wage-as-stimulus theory may not be definitively established, it’s just as plausible as the ubiquitous minimum-wage-as-job-killer theory. One heralds the macroeconomic benefits of the additional income to workers; the other hones in on the macroeconomic harm of new costs to firms. In actuality, the truth may depend on which force is greater.
But a theory like Hanauer’s also has value by evening the playing field in our debate over what is a just and effective minimum wage. The disemployment critique of the minimum wage is a fuzzy and debatable economic theory too, but conservatives continue to trot it out because it’s a simple and elegant argument. So too is the stimulus argument. More income allows workers to spend more money. When workers spend more money, the economy grows. It’s a simple case to make, and it might just be the case that needs to be heard in order to break out of the parasitic low-wage trap.