Could Minimum Wage Increase Boom Or Bust Economy?

President Obama's plan to jump-start the economy starts with increasing the minimum wage and avoiding sequestration. Host Michel Martin talks about those challenges and others, like rising gas prices and expanding waist lines. She's joined by NPR's senior business editor Marilyn Geewax and Wall Street Journal economics reporter Sudeep Reddy.

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MICHEL MARTIN, HOST:

This is TELL ME MORE from NPR News. I'm Michel Martin. Coming up, we're often told we need to forgive and forget when someone has hurt us, but that's easier said than done. It turns out that researchers have actually been studying how it is done. Frederic Luskin directs Stanford's Forgiveness Project and he'll share some of his findings in just a few minutes.

But first we want to talk about something that has been, let's say, particularly unforgiving to many of us in this country. We are talking about the state of the economy. Gas prices have been on a steady march upward. Groceries have been also. The federal government is fast approaching a series of automatic spending cuts that's known as sequestration.

President Obama talked about some of his ideas to address this in his State of the Union Address, including raising the minimum wages.

(SOUNDBITE OF STATE OF THE UNION ADDRESS)

PRESIDENT BARACK OBAMA: We know our economy is stronger when we reward an honest day's work with honest wages. But today a fulltime worker making the minimum wage earns $14,500 a year. Even with the tax relief we've put in place. A family with two kids that earns the minimum wage still lives below the poverty line. That's wrong.

MARTIN: Of course, the president is a Democrat. House Speaker John Boehner, who leads the Republican House had a very different take. Here he is.

(SOUNDBITE OF STATEMENT)

HOUSE SPEAKER JOHN BOEHNER: When you raise the price of employment, guess what happens? You get less of it. At a time when the American people are still asking the question where are the jobs, why would we want to make it harder for small employers to hire people?

MARTIN: We wanted to talk more about this so we've called back two of the people we like to turn to, to explain things like this. NPR's senior business editor Marilyn Geewax is with us. Hi, Marilyn.

MARILYN GEEWAX, BYLINE: Hi, Michel.

MARTIN: Thanks for coming. And Sudeep Reddy is also back with us. He's an economics reporter at the Wall Street Journal. Thank you so much for coming also.

SUDEEP REDDY: Hi, Michel.

MARTIN: So we just heard John Boehner say that the idea of a minimum wage tax hike is just not on the table. The White House has to know that this would be a very tough fight. So Marilyn, why do you think that the president is focusing on wages in this particular - particularly the minimum wage?

GEEWAX: Well, let's look back on the timeline of this. The last time that Congress voted for a raise in the minimum wage it was the summer of 2007 and that was just before the Great Recession began. So since that time we've been dealing with this terrible recession, the very slow recovery. And nobody really wanted to bring up wages. The focus was on saving the banks, getting corporations back in better shape.

But here we are now. It's almost six years later. Actually, corporations, most of them, have been exceeding their earnings forecast. The stock market is back, basically, to where it was in the summer of 2007. Banks have the healthiest balance sheets they've seen in a long time. So the president brought this up in a way to change the conversation.

What's the one thing that hasn't come back? And that's workers' wages. So we're seeing a lot of evidence that there's this growing income gap. A study by the congressional budget office - now, that's a congressional office so it's bipartisan and it's pretty respected - they looked at wages from 1979 through 2007 - what happened over the long term. And that data shows us where the top one percent of earners' household incomes have just about tripled.

But for people who are in the bottom 20 percent, wages are only up about 18 percent after you adjust for inflation. So that's really a big difference. And the president wants to focus on that.

MARTIN: So you think it's less - you're saying it's less of a legislative fight than it's really more of a jawbone. He's trying to get this issue back in front of...

GEEWAX: Yes.

MARTIN: ...the country and particularly policymakers and, one presumes, business owners.

GEEWAX: It's the thing that's really lagging. And I'll tell you, it's affecting business owners because companies like Wal Mart, Family Dollar, Burger King, they're seeing that their customers just don't have very much money. So even some businesses are sort of recognizing that a real problem for the economy right now is this lagging demand, because so many workers have not really seen any raises.

MARTIN: Sudeep, could you talk about that for a minute? And, you know, we've asked you this question before but I think, you know, it's important to ask again. Could you just truth squad this for a minute? I mean, these just seem to be the two pillar, you know, polar opposite sort of positions on this. So what does the data show about rises in the minimum wage? And what do business leaders think about it?

REDDY: Well, there is certainly no dispute that we have more income inequality today than we had 30 years ago, and that the problem is getting worse instead of better. And there's also no dispute when economists look at this that when you raise the minimum wage you raise the wages of the lowest income workers in society. That's the purpose of the minimum wage and it does that.

And there's really no question about that. The dispute comes around employment and what does this do to overall employment for those workers and for other workers. And that's where there's this very wide range of opinion. Some economists have looked at it and said - say that this will actually reduce employment because it will lead businesses to hire fewer workers if they have to pay the higher wage.

And it will lead businesses to consider other measures like higher productivity, whatever you can use - however you can use technology to substitute for labor in any kind of these processes. There's a whole other set of economic studies that looks at this and actually finds that employment does go up as a result of this. And there's...

MARTIN: How would that work?

REDDY: One way it would work is by raising the wages and giving people more money to spend. You actually find that people who are in the lower wage groups spend almost all of their money. You're living paycheck to paycheck. You're boosting the economy. In some sense it can end up being a redistribution. In certain cases you have, higher wage workers in a company might get fewer increases and some of those would go to lower wage workers.

But that's part of the purpose here, is to address income inequality.

MARTIN: What do business people say, privately, to you? Because I know reporters talk to - particularly, you know, there's economists and no disrespect to them, but, you know, researchers, but then there's the people who are actually kind of in the world of employing people. What do they say to you privately?

REDDY: You've got different groups. A lot of the employers you talk to these days say, well, of course we want our workers to have higher wages. You want your workers to be able to survive off the wage they're earning. And a lot of companies are not paying the minimum wage. They're paying something above that. The concern comes from the lowest end - the service industries, hospitality. Whether those are areas that can really absorb some kind of an increase.

And they may have to pass on some of that cost to their customers but that has been an effect of the minimum wage all along. And this is, barring other solutions that you've got to deal with a problem like this, this is one that tends to work, politically, to deal with this.

MARTIN: We're talking with Sudeep Reddy - he's an economics reporter for the Wall Street Journal - and Marilyn Geewax, NPR's senior business editor. We're talking about all the things that are working on the economy right now. Now let's talk about those drastic cuts to federal spending - across the board, automatic spending cuts scheduled to go into effect on March 1st if the president and the congress don't agree on a strategy to reduce the deficit.

Sudeep, I was asking you about what business leaders think about this. What does the public think about this?

REDDY: The public - most of the public isn't paying that much attention to all of this yet. When you talk about the cuts, which are called sequestration, you get a lot of shrugs. People are looking at you with a funny face when you mention that. You will start to realize that people, over the next week, will hear a lot more about it and that's where the public opinion will shift.

This tends to come down to political lines. Most people will end up blaming Republicans for this because Republicans have been pushing for spending cuts. About a third of the public will blame President Obama for it. And when you get down to the heart of the issue, I think most Americans would say that you want to figure out a way to grow the economy.

You want to figure out a way to boost the recovery instead of doing drastic cuts. And actually, I think you're seeing that from a lot of Republicans now too. Their rhetoric has shifted from trying to launch these drastic cuts to maybe do some longer-term measures. And that's perhaps where we'll see them go over the next month.

MARTIN: Marilyn, what about - we were talking about public opinion. I want to go back to the economist now. What do they say about the potential effect on the economy? Because as you see right now, a lot of people are saying well, you know what? It's really not a real cut. It's actually cut in the rate of growth of spending and sort of things of that sort.

And yet we're hearing from people at the Pentagon, we're hearing from people, you know, who work with federal workers, we're hearing from people that it will actually force readiness. What are economists saying about the effect on the economy?

GEEWAX: Economists are pretty famous for arguing. They always have one hand in the other hand. On this subject I think there really is unanimity. People agree that this is bad for the economy. There's not really any scenario where you say, oh, great. Across the board cuts that, you know, hit all at once. That that's an economic driver. But where there is some dispute is over how bad it will be.

I would say the consensus - most economists are saying that it will shave growth by about a half of a percentage point this year. So what that means is instead of growing at three percent, which will be pretty healthy and pretty good, maybe the economy will grow at more like two, two-and-a-half percent. And that's still growth but it's too bad. Any time you lose a half a percentage point like that you're talking about real lives, real people not getting jobs.

So, you know, we have to remember that this a very large economy. We're talking about a $16 trillion economy with 320 million people. So there's lots of people, lots going on. But any time you're losing jobs, these government contractors, school teachers, all sorts of people, will lose their jobs. And for those individuals, this is really catastrophic. Those will be terrible cuts.

So it depends. How long does it last? Does Congress let this kick in and it's just a couple of weeks and then they figure something out? Or are we really talking about going through the whole rest of the year with all of these big draconian cuts?

MARTIN: But a couple of weeks without a paycheck for a lot of people...

GEEWAX: Is pretty bad.

MARTIN: ...is pretty impactful.

GEEWAX: But for example, just Head Start alone, now you're talking about teachers, teachers' aides, people who aren't wealthy. And if they lose their paycheck even for a couple of weeks for their families this is really tough.

MARTIN: Sudeep, all this is going on while gas prices are going up before the usual summer driving season. Why?

REDDY: You have a lot of factors that are affecting gas prices right now. We're about 50 cents up over the last month for a gallon of gasoline nationwide. And we're right now at the point around $3.78 a gallon. That is the highest you've seen for this period ever. And so we're still shy of the record. We're probably not going to get to the record just yet but we've seen a lot of problems with refineries.

We've seen oil prices rise. There are obviously threats across the Middle East that are raising some fears about oil prices. And all of this is coming at the worst possible time because, as we've discussed here many times, everyone's paychecks have shrunk a little bit over the last two months because of the payroll tax going up since January 1st.

And that, added to gas prices, adding to these cuts to government spending, are going to be a really bad problem for the economy unless they're addressed.

MARTIN: Lots going on. Thank you both so much for joining us. And we hope you'll check back with us as events proceed, which they seem to be. Sudeep Reddy is an economics reporter for the Wall Street Journal. Marilyn Geewax is NPR's senior business editor. They were both here in our Washington D.C. studios. Thank you both so much for joining us.

REDDY: Thanks, Michel.

GEEWAX: Great to be here.

(SOUNDBITE OF MUSIC)

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