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This article finds that a federal minimum wage hike would boost the real income and spending of minimum wage households. The impact could be sufficient to offset increasing consumer prices and declining real spending by most non-minimum-wage households and, therefore, lead to an increase in aggregate household spending. The authors calculate that a $1.75 hike in the hourly federal minimum wage could increase the level of real gross domestic product (GDP) by up to 0.3 percentage points in the near term, but with virtually no effect in the long term.
A central part of President Obama's 2013 State of the Union address was a proposal to gradually raise the hourly federal minimum wage from $7.25 to $9. Proponents of a higher minimum wage argue it provides economic stimulus by putting money into the hands of people who are especially likely to spend the extra income.1 Opponents say a higher minimum wage forces firms that employ minimum wage workers to cut jobs or raise prices on goods and services. In this Chicago Fed Letter, we use estimates from our research to analyze both arguments.2
We begin by assessing the number of workers whose wages would be affected by a $1.75 hike in the houriy federal minimum wage. Next, based on our prior research, we predict the likely effects of an increase in the hourly federal minimum wage on total household income, consumer prices, and aggregate household spending. We show that a $1.75 increase in the minimum wage could raise real GDP by about 0.3 percentage points over the short run (firstyear). Allowing more workers to lose their jobs or allowing the spending response to be smaller than our baseline estimates lowers our projected impact of the minimum wage hike on real GDP over the short run. In addition, we predict the hike's impact on real GDP to be close to zero over the long run.3
We view the minimum wage as essentially a "tax and transfer" program. Firms that have to pay higher wages to their workers respond by raising prices on their goods and services. Higher prices on goods and services offset the income benefit for minimum wage workers and reduce the real income of non-minimum-wage workers who did not get a wage...