Over the past few years, we’ve all heard a lot of people blame a lot of different things for high unemployment. Is it high taxes? Burdensome regulations? An angry jobs monster?

This week, Dylan Matthews of the Washington Post reviewed economic evidence which reveals that the biggest driver of high unemployment is low demand. Over 8 percent of Americans are unemployed, and lower-income and middle-class Americans have seen their income and wealth decrease over the last decade. So as you might imagine, many are pinching their pennies and spending less on goods and services. The end result is that businesses don’t have enough money or confidence to hire more workers.

The key, then, to really chipping into high unemployment numbers is creating more demand for goods and services. Matthews suggests looser monetary policy and fiscal stimulus. Here’s another idea: increase the minimum wage.

Businesses paying their workers minimum wage really aren’t paying them much – the federal minimum hourly wage is only $7.25 and the tipped minimum cash wage is only $2.13 per hour. Even if they work full-time, year-round, minimum wage earners aren’t able to lift a family of three above the poverty threshold.

The Fair Minimum Wage Act pending in Congress would help change that. The bill would increase the minimum wage to $9.80 per hour over three years, gradually raise the tipped minimum wage to 70 percent of the federal minimum wage, and index both wages to inflation.

Increasing the minimum wage is an effective way to boost demand – and boost the economy. A report from the Chicago Federal Reserve showed that for every dollar added to the minimum wage, minimum wage households spent an additional $2,800 in the following year. Research from the Economic Policy Institute (pdf) shows that by the third year of implementation of the Fair Minimum Wage Act, the increases in the minimum wage would generate an additional $25 billion in economic activity and create 100,000 jobs.

That’s a lot to gain from an extra $2.55 an hour.

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