Increase the Minimum Wage?

There seems to have been an uptick in the amount of talk about what the federal minimum is on hourly wages in the US. Currently that is $7.25, though a number of states have their own, higher minimum wage limits (Georgia, in some circumstances, has a minimum of more than $10). The thing that seems to push it the most right now is that there is a major wealth disparity in the country, and more and more people are not just poor but working poor: they have jobs (part- or full-time) yet do not have enough income to get above the poverty line.

There are plenty of issues with increasing the minimum wage. Perhaps the most obvious is that it can have an adverse effect on employment levels. The more expensive a worker is, the more likely that a company will not hire more or downsize to keep costs down. On the other hand, if more people on the lower end of the economic scale have more disposable income, that can spur more spending which will create more jobs. In other words, the relationship is complex between wage limits and employment. But even assuming a given increase in the minimum wage will increase unemployment, there is the question of how much. If the effect is small, while the benefits of more spending in the economy are large, then it’s a better deal to force wages up.

But how much should we do this? Apparently we had a high point in the minimum wage back around 1970 with (when adjusted for inflation) about $10; in other words, the wages have been getting smaller with time, down nearly 30% compared to the high point.

Light blue is adjusted to 2009 dollars. Darker purple is real dollars.

Now, $10 an hour would be nice, but some are suggesting that there is a different way to measure what the minimum wage should be. Senator Elizabeth Warren in a recent committee meeting was talking about how if wages increased with productivity (basically, how much money an employer gets per hour of work from their employee), then the wages should be around $22. It is an odd circumstance for the last 30 or 40 years workers have been producing more for their employers while their wages have not seen that same growth.

Increase in productivity. In most quarters and almost every year since 1980 productivity goes up. However, average wages have been basically flat since the mid-70s.

During that meeting, a professor who had studied the effects of the minimum wage noted that if wages tracked with the growth of the top 1% of earners in the US, the minimum would be $33.

However, all these numbers are rather arbitrary, taking the maximum the of what the minimum wage was rather than any other point. To know what is the best for the economy should be a more difficult calculation, and it’s one that isn’t easy to do. According to surveys of economists, there is basically a split as to whether there should be a minimum wage at all, if it should stay where it is, or if it should increase. Part of that split is on the classical vs. Keynsian economist lines, which gets into some fundamental disagreements. Again, it’s complicated, and I don’t pretend to know what is the best path.

I also wonder if increasing the minimum wage will significantly improve the income gaps in the US. The top 1% are fantastically rich, and if businesses that employ minimum-wage workers had to increase their prices to match what they pay their employees there isn’t going to be much taken from the top earners. Costs of products would be pennies, and we are talking much larger amounts than that to get the income disparity of the US into something closer to what people think it should be. Worse, I think that the minimum wage increase will mostly move money from the middle class around rather than from the top earners. After all, the poor and middle class will use services such as fast food and the like more than the top earners who frequent more expensive venues that have fewer or no minimum-wage workers. So I fear that the effects of a minimum wage increase will only make those in the middle struggle a little more to afford things.

Still, it would be a significant help to the working poor that they could have enough income to get out of poverty, be able to save, and be able to invest. So it seems that there may be an overall benefit to some increase to wages. I just have no clue what that should be. But the current state of things is nuts.

What do you think?


One thought on “Increase the Minimum Wage?

  1. A nicely balanced article. Additionally, Austrian economists might claim that the minimum wage /increases/ the inequality gap longterm. It forces small businesses to compete with large corporations not on price but on image/brand, something they have an obvious capital disadvantage in. This stifles upward mobility of the middle class, concentrates wealth in big corporations, and hurts consumer choice and purchasing power.

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