Minimum Wage Requirements Remain Controversial, but Are Here to Stay

Minimum Wage Requirements Remain Controversial, but Are Here to Stay

By Gary Wartik, December 9, 2013

The very subject of state and federal minimum wage laws generate a visceral reaction with many involved in small business and with some economists.  Raising the minimum wage rate generates an equal amount of heat among its other detractors.

The state minimum wage will rise to $9.00 per hour on July 1, 2014, and move to $10.00 on January 1, 2016, up from the $8.00 rate California has had in place since January 1, 2008.  During the last thirty years, California’s minimum wage has increased from $3.35 (1981-1988) to the levels now signed into law.  Overall, the increases have just about kept pace with the state’s inflation rate.  However, the pace of the increases has been somewhat uneven, as in the case of the current changes.  The federal minimum wage remains at $7.25 per hour, but legislation is pending to raise that figure to $9.80 starting in 2014.  One may assume, however that with the present gridlock in Congress, the changes will not be adopted until at least the next Congress convenes in 2015.

The vast majority of those affected by the minimum wage are young people and those who may be older, but under-educated and with limited working skills.  Proponents of raising the minimum wage contend that increasing the minimum wage acts as an economic stimulus. When low-income households earn more money, they almost assuredly will spend all of it, injecting more dollars into the economy.  In fact, a recent study by the Federal Reserve Bank of Chicago concluded that following the last increase in the federal minimum wage in 2009, spending by households with at least one minimum-wage worker increased by $700 per quarter.  A policy paper from a 2012 report by the Economic Policy Institute in Washington, D.C. noted that “By increasing workers’ take-home pay, families gain both financial security and an increased ability to purchase goods and services, thus creating jobs for other Americans.”

During periods of ongoing economic growth, the issue of raising the minimum wage generates less heat than when the change occurs during times of a weak or slow-growth economy.  While the great recession of 2008-2011 is technically over, many consider the economy as fragile, and thus this is not the time to be increase the minimum wage until the economy truly turns around.

Opponents of the minimum wage believe that an increase in the minimum wage is likely to be met by reduced hours or an increase in the workload, especially in the current economy.  Others complain that “artificially” increasing the minimum wage puts inflationary pressure on the economy since increased wages need to be paid for, either by squeezed profits or an increase in prices, or a combination of both.

This may be particularly true within certain industries such as agriculture, retail, food service and hospitality where the minimum wage is most crucial, and further it may be true when the increase is as large as the current 20 percent increase.

Lastly, there are those who believe that available data does not support the thesis that a minimum wage in fact reduces poverty, but in reality just raises the cost of doing business which, in turn is ultimately passed along to the consumer.  Recent history is replete with companies, such as within the fast food industry threatening to reduce the number of jobs they offer, or reduce the number of hours that hourly employees actually work if the minimum wage is increased.  While the threats have been many, in actuality there is little evidence that the workforce is reduced, or their hours reduced for any lengthy period following the adjustment in the state’s minimum wage.  After all, the work still needs to get done and that requires workers showing up to fill the need.  In reality, it has been the higher wage American manufacturing jobs, 20 percent of which were eliminated between 1987 and 2007 (1), and another 1.8 million jobs lost, on a net basis from 2007 forward (1), that offers an irony that should not be lost on us all, and about which we should be more concerned.

If one concludes that the minimum wage is here to stay, then one may also conclude that minimum wage increases have become another variable in the cost of doing business.  Where that view comes under some challenge, however is when the minimum wage level is left in place too long and then the legislature, or Congress move to close the gap with a single large increase over a short period of time. That is what has just occurred in California, and what is also proposed for Congressional action.  It would be more prudent, and thus less disruptive to the economy to have annual increases in the minimum wage tied to the rate of inflation.  This approach would offer more balance in the economy since the changes would be absorbed more slowing by the business community.

There is one other thing to ponder.  If there was no minimum wage, what would someone who earned $3.35 hourly 30 years ago in California be earning today?  We don’t know for sure, but what we do know is that it likely would not be close to $9.00 per hour, and further, we know for sure that most of us would not want to try to live on whatever that figure might have been.

Vision Economics is available to work with small and medium-sized businesses in the effort to make their operations more efficient, and thus more profitable.  For a complimentary phone introduction, please call us 805-987-7322


(1)  US Bureau of Labor Statistics

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