President Obama’s proposal to raise the federal minimum wage would help millions of working families struggling to make ends meet. The White House is also hoping it would help boost the sluggish U.S. economy.
In his State of the Union address, the president pitched the idea as part of broad pledge “to reignite the true engine of America’s economic growth — a rising, thriving middle class.”
Boosting paychecks for the lowest-paid workers, he said, would also be good for the economy.
'"This single step would raise the incomes of millions of working families,” he said. “For businesses across the country; it would mean customers with more money in their pockets."
Obama proposed a series of other initiatives, including $1 billion in new spending to create a network of 15 manufacturing institutes across the country, $50 billion in new infrastructure spending (including $40 billion for urgent fixes for deficient bridges), and a $15 billion construction program to rehabilitate or demolish foreclosed and vacant properties.
He also wants Congress to lower the corporate tax rate, while raising taxes on offshore earnings. The president also proposed expanding and making permanent the research and development tax credit, new research spending on electric and natural gas vehicles and new incentives to double generation of renewable power by 2020.
With Congress bent on cutting government spending, those stimulus measures are going to be a tough sell on Capitol Hill. By boosting the minimum wage, the White House is hoping consumer spending would take up some of the slack.
To help add to the paychecks for those at the bottom of the income ladder, Obama asked Congress Tuesday night to boost the federal minimum hourly wage from $7.25 now to $9.00 by the end of 2015. The plan would also link future hourly rate increases to rises in the inflation rate.
A full-time worker earning the legal minimum currently makes $14,500 a year, the administration said. That $7.25 an hour rate took effect in 2009, phased in over three years, after Congress approved the raise in 2006.
Obama’s proposed increase would also come in stages over three years, raising the bottom rung of the economic ladder to $18,720 for a full-time minimum wage worker. That would still leave a family of four well short of the poverty level of $23,050 a year.
The increase would do more than help low-income households pay the bills. Most of the money would help boost economic growth in the form of higher consumer spending, which accounts for about 70 percent of U.S. gross domestic product.
Last year, economists at the Chicago Federal Reserve estimated that a $1 increase in the minimum wage would raise consumer spending by the average low-wage household by $2,800 during the following year. The biggest impact typically comes from a relatively small number of households who buy a new car, the researchers found.
Based on the Chicago Fed estimate, raising the minimum wage to $9 an hour would increase spending by low-wage households by an average of nearly $5,000 a year. With some 15 million workers expected to benefit from the increase, according to White House estimates, that would add roughly $75 billion in new consumer spending, or about six-tenths of a percent of the current annual rate.
Proponents of the increase argue that, after more than a decade of losing ground to inflation, the increase is long overdue. Adjusted for inflation, the minimum wage has fallen from a peak of $10.51 an hour in 1968.
“Productivity has doubled in that period, and we used to keep the minimum wage rising in step with productivity,“ said Dean Baker, co-director of the Center for Economic and Policy Research. “If we had continued to do that, we would be at $16.50 an hour today.”
Democratic lawmakers have tried several times to boost the federal minimum wage since it was last raised in 2009. Those proposals included a bill last year that would have raised the wage to $9.80 by 2014.
While the federal minimum wage has lost ground to inflation, nineteen states and the District of Columbia have set their own minimum wage rates higher than the federal requirement. Washington state has the highest at $9.19 an hour.
While the proposal may be politically popular with low-wage workers, the idea faces strong opposition from business groups and congressional Republicans who say higher mandated wage rates raise the cost of hiring and dampen job growth.
“Every time we raise the minimum wage, the youth unemployment rate also rises, because people feel they're not in a position to hire part-time people or give people their first jobs,” said Carly Fiorina, a former business executive and Republican Senate candidate. “So there are unintended and negative consequences to this.”
Economists are divided on the impact of raising the minimum wage on job creation. Some studies have demonstrated that mandated wage increases prompt some employers, especially small businesses, to slow or cut back on creating new, mostly low-skilled jobs.
But the overall health of the economy can have a much greater impact on hiring decisions. During the 1990s, for example, the jobless rate fell steadily despite a 35 percent increase in the minimum wage over the course of the decade.
To be sure, the current pace of hiring is much weaker than the pace of job growth during the booming economy of the 1990s. While the wage increase would help existing workers struggling to make ends meet, it wouldn’t help the millions of job seekers still sidelined by the lingering effects of the 2007 recession.
“(A minimum wage increase) is important to millions out there who work very hard and don't earn enough to get above the poverty level,” said Robert Shrum, a Democratic political consultant. “But it won't help us create jobs. That's the problem."