As Scott Sumner writes:
Right on the eve of the biggest negative NGDP shock since the 1930s, Congress and the Bush administration got the bright idea of raising the minimum wage by 40%. Now President Obama seems to want to double down on that failed policy.
And reminds us of FDR´s policies:
FDR tried to artificially raise the nominal wage rate 5 times during the 1930s. Each increase was followed by a sharp slowdown in industrial production growth.
President Obama seems determined to follow the FDR playbook, but forgot to include the monetary stimulus that prevented an outright disaster.
The chart below shows industrial production and the moments when the wages were raised. Things only were not worse because, at least during 1933-36, monetary policy was expansionary.
What has been the effect of minimum wage increases during the “Great Moderation” period, taking into account the behavior of monetary policy?
In the 1990s the minimum wage was raised 4 times (4/90, 4/91,10/96 and 9/97). In the top graph of the chart we have industrial production (with a dashed bar to signal the wage change). In the bottom part the growth rate of NGDP (our measure of the monetary stance) where the dashed bars denote the moment the wage changed and the horizontal dashed line the ‘neutral’ stance of MP, corresponding to a 5.5% NGDP growth rate (along the level trend line).
When the 1990 and 1991 wage increases took place monetary policy was tight (being tightened). Industrial production reflected this. When the minimum wage was raised in 1996 and again in 1997, monetary policy was “expansionary. Industrial production kept rising.
In the 2000s the minimum wage was raised three times: in July 2007. July 2008 and again in July 2009. When the first increase happened, monetary policy was beginning to wobble, so it´s hard to get a handle on the specific impact of the wage increase. It certainly did not help any, so it´s a mystery why politicians everywhere are so fond of announcing an increase in the minimum wage. Maybe it´s just because it ‘sounds’ nice and ‘progressive’.