A Competition Between Two Elasticities

The minimum wage argument will go on and on.   Conservatives insist that raising the minimum wage is a job killer.  Liberals and Economics researchers insist that it kills few if any jobs and makes the lives of many low wage workers better.

It occurs to me that it's fundamentally a competition between two elasticities: the elasticity of the demand for low wage workers relative to their wages, and the elasticity of the spending of low wage workers on their wages.  Elasticity a measure of the supply of something to respond to the effects of other economic factors, such as price, resource availability, etc.  The textbook example is table salt.  We all need salt, but we don't generally need very much.  We will pay whatever it costs for salt, but we won't buy more if it becomes cheaper.  Salt is thus inelastic on price.

So just how elastic is the demand for low wage workers?  Intuitively, not very.   Most fast food and big box stores are heavily constrained by the number of low-wage employees.  If they have fewer people flipping burgers or stocking the shelves, they can't sell as much.  If they let people go, they will get less revenue.  Only if the people they fire were unproductive can they retain the revenue they were getting.  A reasonably well run business would fire these folks without the provocation of a higher minimum wage.

And how about the spending of low wage workers?   Very high.  Low wage workers, it seems to me, fall into three classes:  When I was a low wage worker, I was saving it for college.  I didn't spend it right away, but I spent every cent of it within the following 12 months.  2nd: kids who want some income, but not for something specific and large.  These folks have a similar economic impact though: they spend it on the latest movie or video game or a car, and it's rare that they keep all their earnings for long.  Finally, adults who need the money to support their family and can't get a better paying job.  About 45% of minimum wage workers are 25 or older.  A few may be students, but nearly all of these are working to stay alive.  All of their money from this and any other jobs goes right into the economy. 

So spending of low wage workers is highly elastic on wages--and this includes whether they have a job or not--while hiring of low wage workers is fairly inelastic on wages.  This seems like a pretty definitive answer.  The lives of the low wage workers are improved, and--this is important--the businesses the low wage workers shop at are improved too.  This is consistent with the CBO report that said as many as 500K workers might lose their jobs over 10 years, while 24 million low wage workers would have better lives.  previous experiments suggest that raising the minimum wage actually reduces low wage unemployment