Feel the Bern?

Bernie Sanders has a surprising source of support in college students, particularly here at Penn State. I’ve seen dozens of “Bernie 2016” stickers and hear the infamous “Feel the Bern” quite a few times this semester.

Grandfatherly Bernie has, though, received a significant amount of flak for his economic policies. His policies are liberal to the extreme, some might even say socialist. According to Forbes.com, Sanders argued that people “have no disposable income when you make 10, 12 bucks an hour. When we put money into the hands of working people, they’re going to go out and buy goods, they’re going to buy services and they’re going to create jobs in doing that.”

Great in theory, right? Give the uneducated masses more money, and they’ll go spend it on “stuff”. Consumption, in the mind of many, is the key factor that drives economic growth in this country. 70% of our GDP is consumption – many use this fact to argue for higher minimum wages that will spur consumption from the lower classes and drive the economy forward.

However, it isn’t clear that spending by the poor is more beneficial for the economy. In fact, many argue that increased spending from those who would be making the minimum wage is less potent, seeing as they are more likely to buy (often imported) goods rather than services that the wealthy may purchase.

With this contradiction in mind, it’s important to keep the other option for people’s money in mind: saving. For many, the idea that not all of their extra wealth will go straight into consumption affects the actual impact of raising the minimum wage.

In a study conducted by theCongressional Budget Office, it was estimated that the households benefiting most from an increased minimum wage are those above the poverty line, not those below it.

Furthermore, not all of the increased minimum wage is a simple redistribution from the wealthy to the poor. Utilizing a hike in the minimum wage, depending on the elasticity of certain products (how much people’s consumption changes based on prices), the increased wages will often trickle down to the consumers. Higher input costs will lead to higher prices as firms try to maintain solvency – this price hike will come back to bite those who get the higher wages.

One other unforeseen conflict with increasing the minimum wage is the unemployment that it creates. Logically, it makes sense – if firms have to pay more to employ labor, they’ll have to employ less of it.

Courtesy of Forbes

A simple profit maximization condition from all of your thrilling economics classes depends on equalizing the cost of an input and the return it gets you. For labor, hiring too many means cost is above returns, and you’re losing money. Hiring too little leaves returns above cost, and you’re leaving profits uncaptured. Therefore, once we have equality between costs and returns, raising the cost (minimum wage) without increasing the returns (productivity of labor), firms will be forced to lay off employees to maximize their own profits.

Economics lesson aside, there is evidence of increased unemployment following minimum wage increases. Accordingto Professor Stephen Hanke of Johns Hopkins, the average unemployment rate in countries without a minimum wage is nearly 4% lower than in similar neighboring countries that utilize a minimum wage.

Many sources, however, do cede that there is a significant amount of controversy about the topic. Jordan Weissmann, in the Atlantic, does a great job explaining the ins and outs of raising the minimum wage. John Komlos, a professor at the University of Munich, also defends a raise in the minimum wage in a piece published by PBS. Komlos argues that if the minimum wage in 1968 was adjusted for modern prices, it would be almost $11. He cites an Economist report that calculates what minimum wage should be to stay in line with many other developed and successful countries – a number that would make many conservatives faint.

Courtesy of the Economist

Based on US GDP, the Economist claims that minimum wage should be $12 to be similar to other successful global economies. This number is also eerily similar to the minimum wage way back in 1968, adjusted slightly for increases in worker productivity.

Put simply, who knows what should happen. The employment and ethics numbers might point towards not changing (or event abolishing) the minimum wage, whereas comparisons with other thriving nations could say the exact opposite. It’s a complicated economic problem, and it could be a deciding factor in the polls this year.