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In the question about the minimum wage found here, I have heard several times that an increase in the minimum wage can, as one of several competing effects, "boost the economy" by increasing the income of some workers. Under what conditions could this happen, if at all? Are there any papers (peer-reviewed journal articles) out there that make this claim?

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  • $\begingroup$ Is this claim controversial? $\endgroup$
    – gerrit
    Dec 4, 2014 at 19:11
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    $\begingroup$ To make this coherent, you'd have to explain why the "boost" is not offset by the decrease in income of other workers --- particularly since much of the burden of the implicit tax falls on people who shop at McDonald's and Wal-Mart, and might not look too different from the typical minimum wage worker. $\endgroup$ Dec 4, 2014 at 22:45
  • $\begingroup$ @gerrit just have a look at economics.stackexchange.com/questions/429/… ;) $\endgroup$
    – FooBar
    Sep 26, 2015 at 17:15

2 Answers 2

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From the Chicago Federal Reserve:

Following a minimum wage hike, household income rises on average by about \$250 per quarter and spending by roughly \$700 per quarter for households with minimum wage workers. Most of the spending response is caused by a small number of households who purchase vehicles

http://www.chicagofed.org/digital_assets/publications/working_papers/2007/wp2007_23.pdf

Aaronson, D., S. Agarwal, and E. French (2011): "The Spending and Debt Responses to Minimum Wage Increases" Federal Reserve Bank of Chicago Working Paper, WP 2007-23.

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    $\begingroup$ Spending increases almost three times more than income? $\endgroup$
    – gerrit
    Dec 4, 2014 at 19:12
  • $\begingroup$ Sure. The spending increase is mostly vehicles, which people often need to take out a loan to purchase. Households (hopefully) won't take out a loan without a certain degree of confidence that it can be repaid. If someone is just below that threshold, then increasing their wage will push them over it, and so they'll take out a loan. Alternately, by increasing wage, you increase their incentive to find work, so a car becomes more valuable since it broadens work opportunity. $\endgroup$
    – charlotte
    Dec 4, 2014 at 19:39
  • $\begingroup$ Thanks for the answer! I'll definitely look at this. A working paper from the fed is nice, but I was hoping for some paper published in a top 10 journal over the last couple of decades. I'm curious as to if there is some classic paper out there that codifies this idea. $\endgroup$
    – jmbejara
    Dec 4, 2014 at 23:41
  • $\begingroup$ This paper was published in American Economic Review, 2012 ingentaconnect.com/content/aea/aer/2012/00000102/00000007/… $\endgroup$ Dec 7, 2014 at 16:26
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To add a paper with a, in my opinion, better identification than cross-state fixed effects as added by charlotte's answer, here is Dube et al (2010 ReStat; paywall-free) - in my opinion the paper with the best identification and external validity out there.

They do first-difference in counties with different minimum wages and

find no adverse employment effects. We show that traditional approaches that do not account for local economic conditions tend to produce spurious negative effects due to spatial heterogeneities in employment trends that are unrelated tto minimum wage policies. Our findings are robust to allowing for long-term effects of minimum wage changes.

(emphasis mine). In contrast, they find that the elasticity of earnings (food sector) w.r.t. the minimum wages is consistently around $0.2$ for many different specifications.

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