Minimum Wage, Poverty, GDP

The conservative argument about minimum wage is that it reduces hiring and business expansion. Fewer jobs should mean higher unemployment and lower overall income.

Except when it doesn’t.

The states with no minimum wage in the US have among the weakest economies in the US. The states with the highest minimum wage include the strongest in the US.

Figure 1 below shows minimum wage by state. Figure 2 shows Gross Domestic Product by state.

The most affluent states have the highest minimum wage — California, New York, Connecticut and Massachusetts all have minimum wages of $12 or higher.

The smaller states, economically, either have no minimum wage or a low minimum wage. On a per capita basis, Alaska, Wyoming and North Dakota look good, but only because low GDP is matched by very small population. States like Montana, Idaho, New Mexico, Arkansas and Mississippi are weak in terms of production on both a total and per capita basis. The don’t generate enough production to support their residents.

A classic argument in economics is the chicken and the egg — which comes first, consumer spending or pay. It was Henry Ford who essentially created the American middle class by deciding that workers needed to be paid enough to buy the products they were making. The death of that same middle class involves an assumption that we can reduce the money consumers have to spend and expect spending to continue to grow. That can only work if we have a large number of affluent immigrants entering the US.

Maine is an instructive exception. Maine has had a problem with workers exiting the state to work and live elsewhere, resulting in too few workers to support local business. The higher minimum wage is designed to try to attract workers back to the state.

It’s still not possible to grow an economy without workers. That may change sometime in the future.

Figure 1: 2019: Minimum wage by state. The Federal minimum wage is $7.25
Figure 2: GDP by state: States in which the colored image is larger than the state boundaries outperform; states in which the colored image is smaller underperform

Sources:

  1. https://www.aol.com/article/finance/2019/12/27/these-21-states-are-raising-their-minimum-wage-for-2020/23888570/
  2. http://static4.businessinsider.com/image/557b21efeab8ea3f208b456b-1200-927/us-states-economic-performance-3.png

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