A recent story in the Indianapolis Business Journal confirms what rational observers have been saying for quite a long time: keeping wages low is bad for business, and hurts the economy.
When significant numbers of workers are struggling just to make ends meet, they don’t have discretionary funds to spend in the market. That depresses business activity–and is a further drag on job creation. Most people with even an elementary understanding of market behaviors had figured that out.
What many of us probably didn’t realize is that, according to both the IBJ and that well-known bastion of socialism, Standard and Poor, low wages also threaten state budgets.
Indiana has tied its fiscal wagon to a mule. The biggest source of revenue for the state is its sales tax, which at 7 percent is among the highest in the nation. But the slowdown in wage growth for most Hoosiers means they’re not spending much more money than before. And our wealthiest residents tend to save a greater share of their income and spend it on untaxed services.
Standard and Poor report that the widening gap between the wealthiest Americans and everyone else has made it more difficult for the economy to recover from the Great Recession. Their report attributes the sluggish recovery primarily to low wages; that’s because consumer spending fuels about 70 percent of the economy, and weak pay typically slows economic growth.
This isn’t rocket science. People can’t spend what they don’t have. Economic growth–for better or worse (and that’s a different debate)–requires consumer spending.
That’s the reason that evidence fails to support all those rosy promises about economic growth being triggered by Right to Work laws, and that’s the reason that the economy actually improves in places that raise the minimum wage.
When poorer people have more money, they spend it. What a concept.