How raising low wages ripples through the economy

Walmart employees and their supporters protest in a parking lot after they were asked to move from the side of the front entrance to a Walmart store in Paramount, California on November 23, 2012.

The low-wage service industry is the fastest growing segment in the U.S.  But growing involves growing pains. And just in the last month, workers at a number of national retail chains have walked off the job, demanding higher pay. A raise of a few bucks an hour can affect an individual in many ways. It can also ripple across the economy. 

To understand how, take a guy named Jonathan Smith. He worked at a movie theater chain in Southern California, where he made $7.75 an hour, just above minimum wage. He lived in a cramped apartment with roommates. He rarely had enough money for gas, so he didn't go out much. “It was tough scraping by,” he says. “I was kinda just stuck in my apartment.”

So say Jonathan's employer, the movie theater chain, had given him a raise, to what economists call a "living wage." Or, what Amy Glasmeier, a professor of economic geography at Massachusetts Institute of Technology calls “a wage sufficient for a family  to make ends meet, to just cover the basics.

Glasmeier created a living wage calculator for different parts of the country. It factors in cost of living differences, and whether you’re single, married, or have children, to calculates the bare minimum you'd need to pay rent, healthcare, basic groceries, child care and transportation.    

In a big city, the living wage for a single person is about $12 an hour. About $4 more than Jonathan Smith, the movie theater worker, was making at his job. Of course, that extra money would've been nice for Jonathan.

But don’t forget: “that money has to come from somewhere,” says Robert Pollin, an economist at University of Massachusetts.  And the most likely place for that money to come from, Pollin says, is price increases. 

“Essentially what we're talking about with a price increase is a transfer of money to low wage workers, from people who are consumers.”   

Worst case scenario? Those consumers stop spending money at that business, because prices get too high, and workers get laid off.   

Best case scenario? The business makes more money because workers are happier, and more productive.  

And don't forget-- those workers are consumers too, and now they have more money to spend... Which brings us back to Jonathan Smith, the guy who worked at the movie theater chain. (It never did raise his pay).

Smith quit that job, and got a job at Trader Joe's, which prides itself on offering a "living wage." One of the first things Jonathan did when he got his new paycheck? He’s a big cinefile, so he started going to see more movies. Once he made more money, he could spend it at the kind of place where he used to work.  

About the author

Krissy Clark is the senior reporter for Marketplace’s Wealth & Poverty Desk.

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