On the Minimum Wage

I got my first job in a book store in Libertyville, Illinois, in April of 1968.  I had no appreciable skills [a condition, TLOML would tell you, that has persisted to the current day 😉 ].  I was started at $1.60 an hour.  My employer – a kindly, and fortunately, also a patient man – had no choice; $1.60 was the federally-mandated minimum wage.

Last week, I saw a CNN spot referring to those very days of yesteryear.  The reporter indicated that adjusted for inflation, the $1.60 I was paid as an awkward teenager equates to $12.27 in today’s dollars.  Such makes patently obvious the gross inadequacy of today’s $7.25 minimum wage.

As all who care are aware, several weeks ago the nonpartisan Congressional Budget Office (CBO) issued a report estimating that the increase to the federal minimum wage currently proposed by Democrats would lift 900,000 Americans out of poverty, but perhaps cost 1.4 million Americans their jobs.  Intuitively, it seems – as some opposing the Democrats’ proposal have claimed – that the job loss projected by the CBO will fall disproportionately upon minorities.  It might also tip some small businesses, that have barely hung on through the COVID crisis, over the cliff.  Although some economists scoff at these potential adverse effects, I would submit that these concerns need to be considered as part of an appropriate policy assessment.  Despite my belief that the minimum wage needs to be raised as soon as possible, I nonetheless understood the Senate parliamentarian’s ruling that the measure can’t be included within the current COVID relief package under the Senate’s rules.  The mandate is clearly not conceptually integral to COVID relief.  It should be addressed individually on its merits. If Republicans – who voted for an unneeded and deficit-enhancing tax cut in 2017 – are truly willing to vote against such an obviously appropriate measure, Democrats should put a bill on the floor and make them go on the record.

I venture the following hesitantly, since – as those that read these pages are well aware — I don’t know as much about economics as your favorite bartender.  That said, it’s a pleasure to address an actual policy issue, rather than Donald Trump and his sordid antics.

In reflecting upon the relative merits and the ramifications of the Democrats’ proposal, I have found surprisingly little focus in the electronic media outlets I follow on a couple of aspects that I consider important:  that under the proposal, the minimum wage increase will be phased in over four years (the newspaper reports I’ve seen indicate $9.50 upon enactment, $11 in 2022, $12.50 in 2023, $14 in 2024, and $15 starting January 1, 2025); and that 25 of our 51 jurisdictions (including Washington, D.C.) already have minimum wage levels at or above $9.50 – so businesses in those jurisdictions would feel no impact upon the law’s effective date.  Sixteen – almost one-third of our jurisdictions — have minimum wage levels at or above $11, so businesses in those jurisdictions would feel no impact until the start of 2023.  This gives firms of all sizes in those states time to plan for later mandated wage increases.

What of the 26 states, including my own state of Wisconsin, that have clung to the $7.25 federal wage that took effect in 2009?  The immediate reaction – at least mine – is that these businesses have ridden on the backs of their employees for too long; they should get over it, and pay up.  Although there is arguably rough justice in such an approach, I fear that the likely result of such an abrupt increase to $9.50 could cause significant job loss and small business closures.  A couple of notions:

Assuming that a bill would be passed in 2021, push its effective date (i.e., the date the $9.50 would take effect) to January 1, 2022, and slide all the subsequent dates back by one calendar year (meaning the $15 rate would take effect on January 1, 2026).  There are two potential advantages to this.  First, it gives businesses with minimum wage workers some additional time to plan.  Second, and arguably more importantly, it appears highly likely that by the end of 2021, American consumers will be better able to afford – and therefore less likely to recoil at – price increases than at any time in decades.  Former Investment Banker Steven Rattner, who advised President Obama in 2009 on the auto industry’s challenges, has pointed out that while the past Congressional COVID relief packages helped many in need, those not financially affected by the pandemic banked their COVID-related relief checks.  Mr. Rattner has further opined that if, as projected, over 90% of Americans receive checks under the current bill, this will result in yet greater banked savings.  When one combines this forced savings – no one has been able to spend much on activities during the pandemic – with pent-up demand arising from COVID quarantining (If you traveled before, are you raring to travel again?  If you went to restaurants before, are you raring to go to restaurants again?), 2022 and 2023 might be the perfect period to enact significant minimum wage increases, when virtually all economists predict a vibrant economy driven by COVID-vaccinated consumers with money to spend and an avid urge to spend it.  If there is any credence to the premise that the economy is about to enter a period of abnormal consumerism, one might even consider increasing the second hike from $11 to 11.50, evening out the remaining annual raises to $15 to the extent practical.

(Despite his Democratic roots, Mr. Rattner clearly believes, given the amount of previous COVID relief that has gone into savings, that the current bill should be smaller and better targeted.  I agree; but that train has seemingly left the station.  Given currently increasing interest rates, there is clearly also bond market worry that despite Federal Reserve assurances to the contrary, the proposed bill could cause unhealthy increases in inflation; I share those concerns as well.)

There may also be merit to implementing phased-out tax breaks: in 2022, for businesses employing workers at less than $9.50 on January 1, 2021; and in 2022 and 2023, for businesses employing workers at less than $11 on January 1, 2021. [This is the kind of idea one thinks of during tax season  ;)].  It would certainly be a complex calculation, and require detailed verifiable reporting by those seeking the relief, but such a deduction might provide the firms most immediately and dramatically affected by the new law with an additional buffer as they set future business plans.

While the Democrats’ proposal already provides for a Cost of Living increase after the minimum wage reaches $15, I would include an addition to the COLA multiplier that would gradually cause the minimum wage to achieve the buying power $15/hr. had in 2021, rather than the purchasing power of $15 in the mid-2020s, since increased inflation over the next several years might leave minimum-wage workers further behind than now anticipated.

I don’t support the recent counter proposals to cap the minimum wage at $10 or $11, since it seems that such leave the least compensated among us no way to catch up.  At bottom, I believe that American businesses – of all sizes – remain the most innovative and adaptable in the world.  Once an American businessperson is confronted with a fact – that the minimum wage is rising to $X over Y time period – s/he will find a way to accommodate reality.

I have read that the 1970’s were the high water mark of American union strength, and the point of the smallest compensation gap between management and line workers.  Not coincidentally, it was also the period of the highest inflation in modern American history:  more of our people had money to spend, and they spent it, driving up prices.  Although those of us able to remember the pernicious inflation of those days have no desire to see its return,  such concerns need to be balanced against the risks we are running with too many of our people left without hope of a sustainable life for themselves and their children.  While the threat of inflation is consequential, the threat of despair is existential.  Many aren’t, in real terms, earning what I was making as a teenager over 50 years ago. We need to address a situation that fertilizes the recruiting ground of demagogues.

2 thoughts on “On the Minimum Wage

  1. Good commentary and analysis. To join in some armchair economic speculation, I think the dramatically growing wealth disparity is one of the biggest threats to our economic system and the country. We need to implement significant structural changes quickly. Big picture, it would appear the minimum wage is intuitively (again from an armchair) constructive. It’s also a mechanism already established and accepted by the vast majority of the country. It is perhaps much more palatable than other logical changes like limiting the ratio of CEO to front line compensation. So, let’s get on with it and let the economic engine adjust accordingly.

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    1. Very appreciated words! Am much more comfortable making Noise on politics or foreign policy. Haven’t given up on the ratio idea, however — think such a notion could be a nice complement for a higher minimum wage. Grist for a separate note :).

      Like

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