Wednesday, January 23, 2013

the minimum wage

Governor Abercrombie is proposing a hike in the minimum wage saying it would help the economy.

But would it?

Googling, I find this December 2012 article at learnvest (the author FWIW is Gabrielle Karol who has a B.A. in English from Yale -- so she's not an economics expert but is presumedly smart and should be able to think/write clearly enough to be understandable).

this summer, the Fair Minimum Wage Act was introduced in Congress to raise the minimum wage from $7.25 to $9.80 and index it to inflation, making it a current political issue. Though the bill is currently sitting with a committee awaiting further action, if it passes, it could significantly change millions of Americans’ answer to the question: Are you better off than you were four years ago?

The first minimum wage law was passed in 1938, guaranteeing workers at least 25 cents an hour (woo!). The heyday of the minimum wage was in the late 1960′s, when the wage was high enough relative to the cost of living to provide a secure income. Since then, it’s risen slowly but surely to $7.25 an hour, which adds up to $15,080 a year for full-time employees.

While the dollar amount has increased over time, the real value has not—it has declined by 30% since 1968, because over the years, the minimum wage has not kept pace with inflation, which is the increase in the general cost of goods and services over time. That means workers aren’t getting as much bang for their buck, so to speak. (Find out why inflation is expected to rise very soon.)

The yearly $15,080 made by a full-time minimum-wage worker, who typically works in retail or food preparation, or as a personal and home care aide, office clerk, customer service rep, waiter/waitress or construction laborer, is below the poverty level for a two-person household. And for tipped workers, the minimum wage is even lower—a measly $2.13 an hour. [so make sure to leave your tips]

While the minimum wage barely provides a solid living as is, studies have shown that workers earning the minimum are actually being underpaid by their employers. A 2008 study of low-wage workers in Chicago, Los Angeles and New York showed that 26% were paid less than the minimum wage, 70% worked off the clock before or after their shift and 76% were underpaid for overtime hours. All told, this resulted in an average loss of $2,634 in earnings for these workers.

Proponents of the Fair Minimum Wage Act argue that raising the minimum wage to $9.80, and then “indexing” it to inflation so it rises at the same rate would help ensure that these low-wage earners would take home enough salary to live on and pay for basic goods and services. But would it?

A living wage ensures that a worker can pay for basic necessities like housing, food, transportation to work and health care. A common definition states that the living wage should be high enough that no more than 30% of take-home pay needs to be spent on housing.

But full-time employees being paid the current minimum wage will have incomes below the living wage in most areas of the country. In dollar terms, that means that if you are a full-time worker supporting a family of four on the current minimum wage, your household income is $7,000 below the poverty line. Proponents of raising the minimum wage to a living wage argue that doing so would give workers and their families a better chance of climbing out of debt and poverty.

As an increasing number of workers take on low-wage jobs, poverty in the United States has increased: In 2005, 12.6% of Americans were living in poverty, compared to 15.7% this year (almost 50 million citizens)–the highest rate of poverty since 1965. Raising the minimum wage to a living wage would hopefully help to reverse this trend.

Higher wages don’t just benefit the individual earner, they also help the economy at large by increasing consumer spending. One 2011 study by the Chicago Federal Reserve Bank showed that every dollar added to the hourly minimum wage resulted in $2,800 in yearly additional consumer spending by that worker’s household.

Additionally, a 2009 study from the Economic Policy Institute predicted that upping the minimum wage to $9.50 an hour would result in $60 billion in additional spending over two years. Furthermore, this additional consumer spending would lead to more job creation—an estimated 100,000 new full-time jobs.

Many workers who earn more than the minimum wage—28 million, in fact—would also see their earnings increase as a result of raising the minimum wage, says the Economic Policy Institute. Why? The minimum wage is seen as the base number from which their wages are calculated, so if that number is raised, their earnings will increase accordingly … which will lead to even more consumer spending.

With all the seeming benefits to raising the minimum wage, is there a compelling reason not to raise it, at the very least to a living wage? And why shouldn’t it be indexed to inflation?

Those opposed to raising it often argue that doing so will put too great a strain on employers concerned with keeping costs down, which will ultimately lead to companies being forced to slash jobs to stay afloat. However, economists like Arindrajit Dube of the University of Massachusetts-Amherst showed that over a 16-year period, areas that raised the minimum wage did not see more employment loss than comparable areas with lower minimum wages.

While over 100 Democrats helped to introduce the bill in the House of Representatives during the summer to raise the minimum wage, most Republicans will likely argue that the fragile economy prohibits such a drastic change to the minimum wage. Though President Obama campaigned in 2008 on the promise to raise the minimum wage, he has not been active in that fight in some time, and in March, Mitt Romney retracted comments he had made as recently as January saying that he would like to see the minimum wage indexed to inflation.

Despite the likely political standstill on the minimum wage issue, recent polls have shown that 70% of Americans support raising the minimum wage and believe that doing so has the power to help the economy in these uncertain times.

[So thinking it over, raising the minimum wage would force the employers to spend more on wages (assuming they don't have an offsetting amount of layoffs).  But then they would probably raise prices to offset the increase in costs.  The increased wages would be be likely totally spent by the minimum wage workers (rather than saved) and pumped back into the economy.  And it would eventually back up to the employers.  So the money would be circulating more.  Which is what you want for the economy.  But then the increase in prices would be more inflation.]

*** 4/27/14

Buffett not arguing against raising the minimum wage, but suggests that increasing the earned income tax credit may be a better way to attack the problem.

*** 5/5/14

Economists everywhere may soon be thanking Seattle Mayor Ed Murray. Not because of his inspired policymaking, but because Murray seems ready to turn his city into a gigantic laboratory for one of the most ambitious, and quite possibly misbegotten, labor market experiments in recent memory.

Yesterday, Murray announced a plan that would gradually raise Seattle’s minimum wage to $15 an hour and tie it to inflation, which won approval from a large committee of business and labor leaders, as well as some city council members. Today, Washington state’s minimum is a comparatively piddly $9.32. The full council still has to consider Murray’s proposal, but should it pass, Seattle might not just have a far higher minimum wage than its surrounding suburbs, where businesses can easily move; it might well have the highest minimum wage in the world.

I generally support a higher pay floor. And I love a good experiment. But I can’t help but wonder if Seattle is poised to take a step too far.

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