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How many times do we preface an analysis with “All things being equal … ”? And how many times are we reminded that all things are rarely equal? Life has an annoying way of being messy, making linear conclusions problematic.
Take current debates over raising the minimum wage.
Everyone knows that raising the minimum wage kills jobs. Employers have to pay more per hour, so they’ll hire fewer people. Obvious.
Except real life doesn’t seem to work that way. Washington Monthly recently reported on the experience of states that ignored the conventional wisdom and raised their minimum wages.
Such hikes were not without opposition. Notably, fast food companies sounded the alarm over the possible consequences of minimum-wage hikes—namely, that consumers would pay higher prices and companies would be forced to cut jobs.
Six months after California’s minimum wage rose to $9, the state’s job growth continues to outpace nearly every state in the country. In November, California added more than 90,000 jobs, its highest single-month total in almost two decades.
The Golden State is not alone. Of the 13 states that saw minimum wage hikes go into effect on Jan. 1, all but New Jersey saw positive job growth in 2014. And as a group, those 13 states averaged significantly higher job growth than states that did not raise the minimum wage.
What accounts for this irritating refusal of experience to align with our reasonable expectations?
Consumer demand is far and away the most important factor in job creation. When poorer people have more money to spend, they spend it. When demand increases, the economy grows. When business improves, jobs are created.
Nick Hanauer is a billionaire whose diatribe against America’s growing inequality went viral a while back. He proposes replacing “trickle-down” policies with something he calls “middle-out” economics.
Middle-out economics rejects the old misconception that an economy is a perfectly efficient, mechanistic system and embraces the much more accurate idea of an economy as a complex ecosystem made up of real people who are dependent on one another.
Which is why the fundamental law of capitalism must be: If workers have more money, businesses have more customers. Which makes middle-class consumers, not rich businesspeople like us, the true job creators. Which means a thriving middle class is the source of American prosperity, not a consequence of it. The middle class creates us rich people, not the other way around.
Hanauer encourages today’s businesses to emulate Henry Ford, who understood that workers are also consumers. Ford raised his factory workers’ pay levels to a then-unheard-of $5 a day, so that his laborers could also become his customers. Hanauer also reminds us that we’ve had 75 years of complaints from big business—“when the minimum wage was instituted, when women had to be paid equitable amounts, when child labor laws were created.”
Every time, the capitalists said exactly the same thing in the same way: “We’re all going to go bankrupt. I’ll have to close. I’ll have to lay everyone off.” It hasn’t happened. In fact, the data show that when workers are better treated, business gets better. The naysayers are just wrong.
It would be nice to think that our elected representatives might use the upcoming legislative session to review the arguments and—more important—the evidence about minimum wage levels and other measures that might improve Indiana’s none-too-robust economy.
But they’ll probably be too busy with measures like Scott Schneider’s proposal to allow “religious” discrimination against gay Hoosiers.•
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Kennedy is a professor of law and public policy at the School of Public and Environmental Affairs at IUPUI. She blogs regularly at www.sheilakennedy.net. She can be reached at skennedy@ibj.com. Send comments on this column to ibjedit@ibj.com.
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