Does a higher minimum wage help?

Here is the long-term problem: wages in the US at the bottom to middle have stagnated or fallen in the last 30 years.* Most millennials do not believe they will earn more than their parents and the statistics back them up. The US has never been in this situation before. You see it at the retail level. The dependable US consumer, who as a group was 70% of the economy supporting most of the world’s production in one way or another, is buying less and that is going to continue on a downward trend. This will affect all of us.

In response to wage stagnation, wage regulations are popping up everywhere at the local level. The City of L.A. is proposing a higher minimum wage of $13.25/hour. Hotels near LAX have a new $15.37 minimum wage. California just went to a $9 minimum wage in July and it will go to $10 in 2016. This is happening in other states and cities, as well. This is a lot of government driven wage increases.

Why isn’t this being left to market forces which would naturally force an increase in wages? Perhaps it is because the market is working in the opposite direction.

Let’s start with the recession. So many people lost their jobs as companies went out or down-sized, such that workers were afraid to move to companies that might be less stable. So they stayed where they were. Employers have not felt pressure to raise wages for existing employees and they were not faced with the higher wages new employees tend to demand. That is starting to change as workers are beginning to feel safe to move and newer employees cost more.

The second is price stability. Inflation has been minimal, so cost of living increases are minimal, if they happen. The lack of inflation and stable wages kept a lot of businesses afloat during the tough economy.

Third, many people are unemployed, so if you don’t like this job at this wage, someone else would be happy to step into your shoes. This one is going away fast. Vistage Members are complaining that they have trouble finding qualified candidates at every level.

And a fourth reason (there are many more), international competition for goods and services means we have to sell at a price point that limits our profit margins and our ability to pay higher wages. So, owners try to keep the wages down to stay somewhat competitive with companies that pay their workers $4755/year in China.**

On the other side, at both the state and local level, government is getting pressure from constituents who are struggling at the bottom of the wage scale to do something. Since tax rates have not increased (except for state marginal rates at the top), governments are squeezed. The only tool government has left is to propose new regulations to increase the minimum wage. If the minimum wage goes up, the percentage of citizens needing government services goes down. So, it is a win-win for local government and the individuals who see higher wages. And, the cynical Californian would guess that all these politicians who are moving back and forth due to term limits between Sacramento and local government must pay attention to their image with their voters.

Whatever low income earners gain in extra wages is surely going to be spent right back into the local economy on food, clothing and shelter. That helps all the small and local businesses which have improved very slowly since the recession- unless, they have to lay off employees to pay the higher wages. Sigh! It feels like we are starting around the wheel all over again.

Next week we will talk about what resourceful Vistage companies are doing about it.

 

*The Uncomfortable Truth About American Wages, NY TImes, Oct. 22, 2012 by Michael Greenstone and Adam Looney

 **CNN’s online global wage calculator, which uses data from the International Labor Organization

Illustration courtesy of blogs.reuters.com/summits