Wage increases are key to economic growth – stimulate production and demand

Increasing wages for those earning the least is fundamental to ensuring an equitable economy that leaves no one behind. Wage increases among those who earn the least helps Black, brown, Latinx, and gender and sexual minorities most, as these communities are disproportionately represented in low-wage populations. For example, approximately 60 percent of low-wage earners are women, and wage increases at the bottom of the income distribution are likely to benefit nearly one-third of Black Americans and a quarter of Latinx Americans.

Moreover, beyond the equity-related benefits of higher wages, increasing wages for low-income workers in particular also provides benefits for the economy as a whole. It can be difficult to isolate the empirical effects of wage gains via market forces on living standards given the various moving parts, such as nonwage gains, fiscal stimulus, and price volatility. However, by drawing parallels to a policy-induced phenomenon like minimum wage increase, which by construction raises the incomes of low-wage workers, we can identify the potential impact of real wage gains for those who earn the least.

Previous research on minimum wage increases illustrates that the additional income arising from raising the minimum wage represents a shift of income from profits (not likely to be spent immediately) to low-wage workers, who tend to consume it immediately. This feeds back into the economy as a result of increased aggregate demand. Furthermore, the extra consumption is expected to be greater than if the incomes of those with already higher wages were to increase. The marginal propensity to consume, which is indicative of the proportion of disposable income that individuals spend on the consumption of goods and services, tends to be higher for lower-income workers. There is also evidence that individuals with lower wealth have higher marginal propensities to consume than wealthier ones; or that those with low wealth-to-income ratios have higher marginal propensities to consume. Therefore, rather than being a cause of alarm related to inflation, wage gains for low-income workers are necessary for a strong economic recovery.

Moreover, recent studies find that spending on services, particularly retail and food services, is likely to increase following a minimum wage increase. This would be a welcome development, as the pandemic-driven slowdown disproportionately affected the service industry. Increased spending could catalyze a full recovery of the service sector. A majority of low-paying occupations are concentrated in the food and retail industries, both of which primarily employ low-wage workers. Increased demand in these sectors could also increase the demand for labor, potentially restoring pre-pandemic employment rates.