Aggregate Effects in the National Economy

In discussions about the national economy, policy changes can have secondary effects which outweigh the immediate effects that first occur to us.

Minimum Wage

Dollar bill image

Many people argue that raising the minimum wage will hurt the lowest tier of workers because it will cut the number of jobs that are businesses can offer them. Surprisingly statistics show that does not happen.

How can such a seemingly reasonable line of logic lead to an invalid conclusion?

Aggregate Effect

The mistake arises because the argument ignores that the aggregate effect of the increased income of retained minimum wage workers. Their increased spending affects the entire economy. GDP increases. Consider the two paths available to the money used to incrementally raise the minimum wage.

  • When the minimum wage is raised, those workers who retain their minimum wage jobs spend all of their newly increased income on consumption.  As is often bandied about, consumers drive 70% of the GDP.  With the increased income entirely spent, all the increase goes into GDP growth.
  • If the wages are not increased, the retained profits are kept by owners who spend considerably less than 100% of their income, thus GDP gets a smaller boast.

GDP Growth and Additional Hiring

The GDP increases more from additional spending than it loses from any initial, small decline in minimum wage hiring. 

Additional economic activity induces employers to hire more minimum wage workers as owners see greater consumption of their goods.

Unanticipated Consequences

In news and media, one often hears of unanticipated consequences of laws and policies. In the case of a minimum wage hike, here we see the surprising positive effect across the whole economy that is overlooked when the focus is held too closely to only minimum wage workers and their employers.


Dollar bill image. Thanks to neONBRAND on unsplash.com

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