President
Obama and the Democrats are proposing a 39% increase in the minimum wage from
$7.25 per hour to $10.10 per hour. They
don’t explain how they came up with that number, but they think it is only
fair. They justify the increase by
claiming it’s required to keep up with inflation.
So it
brings up the interesting question “Which comes first? The chicken or the egg?” But in this case it’s slightly
different. “Which comes first? Inflation or an increase in the minimum wage?”
The
United States Department of Labor website has information on both topics. They keep track of changes in the “Consumer
Price Index’ (inflation) and on the minimum wage.
The
Federal minimum wage was instituted in 1938 at $0.25. Congress has acted multiple times since then to
increase it to its current level of $7.25 (Jul, 2009). Using the government’s inflation calculator
we see that $0.25 in 1938 would be the equivalent of $4.15 stated in 2014
dollars. So by that measure the increase
in the minimum wage has outpaced the rate of inflation over the past 75
years. In 1991 the minimum wage was
$4.25 which would be the equivalent of $7.30 per hour in current dollars. So we find that even on a shorter time
horizon the minimum wage has kept up with inflation.
But
as the minimum wage has increased, what else has increased? A trip back in time will help demonstrate it. I can remember back to 1956 when a first
class stamp was a pink Abraham Lincoln and cost $0.04. January 2014 the first class postage rate
increased to $0.49. During that same
period the minimum wage has increased from $1.00 to $7.25. Another example is the price of a gallon of
gas. In 1972 I could buy a gallon of gas
for $0.49 at my neighborhood gas station.
Now a gallon of gas costs approximately $3.55. During that same period of time the minimum
wage has gone from $1.60 per hour to $7.25 per hour.
Since
salaries and benefits are often the largest component of a business’s cost, it’s
easy to see that the increase in the minimum wage has been a major contributor
to the increase in prices. The increase in
the cost of benefits (mainly driven by government policies) has also driven up
employers’ costs resulting in even more of an rise in prices.
President
Obama and the Democrats are proposing that the minimum wage be increased by 39%
over a three year period. So if wages
make up a significant portion of the cost of products, doesn’t that mean that
we will see much higher prices as a result of the increased minimum wage? It seems quite logical that we would.
The
late 1970’s to early 1980’s was a period of some of the highest inflation our
country has faced in recent years. During
that time the minimum wage increased from $1.40 per hour in 1967 to $3.35 per
hour in 1981. That was an increase of
$1.95 per hour or nearly 140% in just 14 years.
Is it any wonder why prices (inflation) increased dramatically too? So we find that a rising minimum wage drives
up costs which in turn drives up prices (inflation) requiring an increase in the
minimum wage. It can be a never ending
cycle.
But we
also find is the price of some of the most important parts of our lives (i.e.
housing and taxes among many others) can vary dramatically in different
states. We find the highest prices for those
items on the east and west coasts and in large cities. A minimum wage of $7.25 buys much less in
those parts of our country than in rural and Midwestern/Southern states. So does it make sense to have the same minimum
wage in those less costly areas of our country as in the high cost cities and
coast states? If not, that would call
for regional or area specific minimum wages rather than a national minimum
wage.
The
problem with regional minimum wages is, as high cost areas of the country raise
their minimum wages, they become even more costly. And at some point they become unattractive to
businesses and individuals. Just look at
cities like Detroit and states like California if you want good examples.
So in the meantime President Obama and the Democrats want to raise the minimum wage 39% in just three years. We already have experience as to what that will cause. That’s a rapid rise in prices or inflation! Yet the WH OMB is projecting that inflation won’t increase more than 2.3% a year between now and 2024? That hardly reflects the reality of the policy they propose.
