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The Missing Piece of the Minimum Wage Debate

Editor's note: shortly after the publication of this article, the Senate Parliamentarian issued an advisory that the minimum wage provision of the COVID-19 relief bill would not be eligible for inclusion in the reconciliation process. If the Senate acts in accordance with this advisory, it would likely subject a minimum wage bill to the legislative filibuster under current Senate rules. 

As part of his massive $1.9 trillion emergency pandemic relief plan, President Biden called on Congress to raise the federal minimum wage to $15 an hour from the current $7.25. Democratic senators are waiting for a ruling from the Senate parliamentarian on whether such a provision can be in the relief bill and debating whether to raise the minimum wage to $15 or some lower amount.

The debate over a minimum-wage increase has been fierce. Supporters claim raising the minimum wage would benefit women and people of color — the very demographics hurt the most by the coronavirus pandemic.

Yet opponents argue it would increase unemployment because higher wages would force small businesses, already under economic duress because of the pandemic, to lay off employees.

This conversation, however, ignores just what increasing the minimum wage does to the larger economy. To understand the intent of the federal minimum wage, it is necessary to look at the original minimum wage legislation — the 1938 Fair Labor Standards Act (FLSA), an enduring part of President Franklin D. Roosevelt’s New Deal.

As with much New Deal legislation, the aim was to create what New Dealers called purchasing power. The basic idea: Raising wages would increase consumption, thus giving businesses the incentive to hire more workers. It worked, reminding us today that mandating higher wages doesn’t just increase standards of living. It boosts the economy.

Many New Dealers believed the Great Depression was caused by underconsumption. Productivity among American manufacturers doubled during the 1920s while wages lagged. As American manufacturers churned out increasing numbers of consumer durables, particularly automobiles, consumer spending did not keep up. Businesses couldn’t sell their inventories, and so they began cutting costs and laying off workers. The economy spiraled downward.

Advocates of increased purchasing power argued that raising wages would increase consumption, thus giving businesses the incentive to hire workers. Edward Filene, the founder of the Filene’s department store chain and an advocate for boosting consumption, argued that “increased production demands increased buying.” According to Filene, “the greatest total profits can be obtained only if the masses can and do enjoy a higher and ever higher standard of living. Mass production is production for the masses.”

Read entire article at Made By History at the Washington Post