A 2011 paper by economists at the Federal Reserve Bank of Chicago found that a $1 minimum-wage increase boosts household income by about $250 and spending by about $700 a quarter in the following year. The spending increase is driven by a smaller number of households that make large purchases, primarily vehicles.
I thought this was an interesting comment. The premise is that those who get a $1 per hour raise spend more than they earn the following year, and this is good for the economy. So, lets run some numbers to see what we get.
At current minimum wage, a 40-hour a week job would pay $15,080 per year before taxes. The $1 per hour raise bumps that figure up to $17,160. Great! Now, if this person spends an extra $700 per month over their previous spending, their disposable income decreases by $2800 per year, leaving them with an effective annual income of $14,360, a new car, and debt payments for the next five years.
Obviously, not everyone in this situation buys a car (and if you only make $15K, why are you buying a car with a $700 a month payment anyway??). Those who don’t manage their pay raise will find that is slips away. This point really speaks to being smart and budgeting your money every month. These skills are even more important when you earn less. Putting good money management habits in place and living below your means can allow you to prosper in the future – at the expense of government statistics.