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The Minimum Wage – Interesting Observations To Consider

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minimum wage workerAs a bond investor, I take great interest in discussions surrounding wage growth.  Wage growth is one mechanism through which more money can end up in the hands of the consumer.  And more money available for purchasing goods and services could cause upward pressure on prices, something bond investors should pay close attention to.

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In recent months, striking employees of several well-known fast-food and retail establishments have received national attention in their quest for a $15 per hour minimum wage.  With that national attention came a lot of talk about companies choosing to automate work or lay people off if forced to pay a $15 minimum wage.  Rather than enter the debate about how many jobs may or may not be lost if companies are forced to pay workers more, I would like to take a different approach with this article.  What follows is a series of observations about the minimum wage and potential consequences of raising the minimum wage from an employee’s perspective.

Subsidies to low-income workers

  1. I do not know how many people working in jobs that pay less than $15 per hour are on food stamps.  But based on eligibility requirements for the Supplemental Nutrition Assistance Program, I would venture to guess there are quite a few.  If the minimum wage is raised to the $15 per hour demanded by workers, many people currently eligible for food stamps may become ineligible for food stamps.  The average monthly benefit per person (not per household) was $133.41 in FY 2012.

  2. I do not know how many people working in jobs that pay less than $15 per hour are on Medicaid.  Starting in 2014, individuals under 65 years of age with income below 133% of the federal poverty level will be eligible for Medicaid.  My hunch is that there is significant overlap between the number of people working minimum wage or near minimum wage jobs and incomes below 133% of the federal poverty level.

  3. There are approximately 1.2 million households (not individuals, but households) currently living in public housing units.  The U.S. Department of Housing and Urban Development (HUD) provides federal aid to local housing agencies that offer subsidized housing to low-income residents.  Income limits for subsidized housing vary by household size and location.  But based on a screen of income limits in several parts of the country, I would venture to guess that some of those 1.2 million households have individuals currently making less than $15 per hour.

Given the likelihood that many individuals making minimum wage or near minimum wage qualify for one or more of the aforementioned subsidies, I wonder the extent to which striking workers who currently receive any or all of those subsidies have thought through the consequences a higher minimum wage could have on their eligibility requirements.  Depending on how many subsidies one currently receives and the number of household members, it wouldn’t surprise me to hear about some people being worse off after receiving a raise to $15 per hour because they lost their eligibility for certain subsidies.  The purpose of this observation is not to enter into a debate about whether or not subsidies are a good thing.  Instead, I simply want to point out that despite a $15 minimum wage, if eligibility requirements for the aforementioned programs remain unchanged, the net amount of new money chasing goods and services in the economy wouldn’t necessarily create the type of demand increases (and upward pressure on prices) many might expect.  From a pure dollars and cents perspective, striking employees might, as a collective group, be better off asking for a smaller raise that enables them to keep other benefits.

A historical comparison of minimum wages

Since July 24, 2009, the federal minimum wage has been $7.25 per hour.

In 1965, the minimum wage was $1.25 per hour.  Using the Bureau of Labor Statistics’ “CPI Inflation Calculator” as a guide, $1.25 in 1965 had the same buying power as $9.27 in August 2013.

Three years later, in 1968, the minimum wage had been raised twice, first to $1.40 in 1967, and then to $1.60 in 1968.  In 1967, $1.40 had the same buying power as $9.79, and in 1968, $1.60 had the same buying power as $10.74 in 2013.  The year 1968 represented the peak in real-minimum-wage hourly earnings.  Forty-five years later, in August 2013, the buying power of the minimum wage is 32.50% lower.

How much does this matter?  The Social Security Administration (SSA) provides wage statistics dating back to 1990.  It is interesting to note that in 2011 (the most recent numbers), nearly one-third of all wage earners in the United States made an amount equal to or less than a full-time worker paid the minimum wage.  According to the SSA’s wage statistics, in 2011, somewhere between 40.28121% and 47.36245% of all wage earners in the United States earned an amount equal to or less than the amount of buying power a full-time worker making the minimum wage in 1968 earned.

A better option for minimum wage workers?

If the status quo is simply unacceptable to minimum wage workers, and if, as some claim, a hike in the minimum wage will result in jobs lost, perhaps a better solution for employees is a period of deflation.  If an employee is already making the minimum wage, a period of deflation would only increase the real earnings of that individual.  From a minimum wage employee’s risk-reward perspective, it might be smarter to push for an end to policies that are preventing the U.S. economy from experiencing the deflationary forces that are lurking beneath the surface rather than argue for a hike to the minimum wage.

Yes, it is possible that companies would react to deflation by cutting jobs.  But if that’s also going to happen under the other option (a minimum wage hike), then the threat of job losses becomes a secondary factor in deciding whether a wage hike or deflation is better.  The primary factor would be the likelihood of those who do remain employed to experience steady or rising buying power.  Only in a deflationary environment would that be guaranteed.  Additionally, given the massive cost cutting initiatives corporations have undergone in recent years, it may be difficult for businesses to lay off many more employees, even in a shallow-to-modest deflationary environment.

Conclusion

The purpose of this article is to provide food for thought.  A lot of what I come across regarding the minimum wage is the same arguments and line of thinking that have dominated the discussion for years.  When forming your opinion on the subject, I think it is helpful to read/hear as many different ideas, data points, and observations as possible.  With that in mind, I hope you found this article useful.

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