House Speaker Nancy Pelosi, reacting to the quarterly economic numbers, claimed that gross domestic product would be boosted if the minimum wage were increased, but the Congressional Budget Office recently reached the opposite conclusion.
Democrats have been struggling with ways to run against President Trump on economic issues, given that the U.S. economy is still growing at a solid pace and unemployment is at a 50-year low. Friday brought news that the economy grew at a 2.1% annualized rate in the second quarter, which was slower than the 3.1% of the previous quarter, but still solid and ahead of analyst expectations.
Asked about the numbers Pelosi suggested that the numbers could be stronger, insisting, “I do believe our GDP will rise when we have — when we raise the minimum wage and people have more purchasing power, because these are people who will spend, inject demand into the economy, and therefore our GDP will rise.”
However, earlier this month, the CBO found that increasing the federal minimum wage to $15 per hour would actually “reduce the nation’s output slightly.”
Because the CBO report’s findings have been cherry-picked by those on both sides, it’s worth taking a moment to spelling out the various interactions involved with such a hike.
On the positive side, CBO found that raising the minimum wage could increase wages of up to 27 million Americans. But on the negative side, it found that up to 3.7 million workers could lose their jobs as employers choose to hire fewer people in response to the increased labor costs. It also found that the wage hike would, “reduce business income and raise prices as higher labor costs were absorbed by business owners and then passed on to consumers.”
Contra Pelosi, CBO found that the wage hike would, “Reduce the nation’s output slightly through the reduction in employment and a corresponding decline in the nation’s stock of capital (such as buildings, machines, and technologies).”
Though Pelosi is trying to argue that the increased wages would boost consumer spending power and stimulate the economy, in reality, those wage gains would be offset by the fact that fewer people would have jobs and that the prices of goods and services would be higher as businesses pass on the higher labor costs to consumers. CBO concluded that ultimately, the wage hike “would reduce total real (inflation-adjusted) family income in 2025 by $9 billion, or 0.1 percent.”
Pelosi’s comments are even more absurd when one looks at the actual details of the GDP report, which found that consumer spending is growing at a robust 4.3% rate, but it was actually business investment that turned negative. So again, consumer demand is not the problem here, as Pelosi suggested. And a federal law to artificially raise costs for businesses would not be a good way of spurring business investment. Unless, maybe, government wanted to encourage capital investment in robots to replace $15 per hour workers.
