States Lead the Nation on the Minimum Wage

23 Mar 2015 12:54 PM | Deleted user

Because the federal government has failed to raise the minimum wage, many states have been taking the lead. There are a couple of issues here. The first concerns the failure of the federal government to be the great equalizer of disparities between the states, a role it has assumed since the Great Depression. And the second is that even following increases, it has failed to maintain value most of the time.

The principal reason a federal minimum wage was needed was because states free to set their own rates meant that, if states even set them at all, there would be disparities between the states. A federal minimum wage would at least create a uniform floor. Because there were wide regional disparities in wage rates, this was of critical importance. Wage rates and standards of living were much higher in the industrial North than in the more agrarian South.

Southern states initially opposed the federal minimum wage because they feared it would force wages up in a region where the standard of living was lower. They also opposed it because they viewed it as another example of northern carpetbagging. Meanwhile, northern states desired a minimum floor because they wanted to remove the incentive for northern factories to relocate down South where wage rates were lower. But they also viewed the minimum wage as tool for economic development in the South. Because wage rates were so low a uniform standard would be needed. For a period of time, that uniform standard appeared to work.

Consider that in 1968 the federal minimum wage of $1.60 an hour was really $10.75 an hour in 2015 dollars. Although in 1969 the value of the minimum wage fell to $10.19 an hour in 2015 dollars, it was still at 113.8 percent of the federal poverty level. Put another way, the minimum wage was at its highest value in 1968 and has never been worth as much since.

The second major problem with the federal minimum wage is that it requires an act of Congress every time it is to be adjusted. Unlike some European countries, increases in the minimum wage are not automatic. To have a minimum wage that enables individuals to support a family above the poverty line would require some mechanism for automatically adjusting the wage on an annual basis. Automatic adjustment could be accomplished through indexation, which would effectively take the politics out of the minimum wage.

Past calls for indexation have focused either on some percentage of average annual hourly earnings or the Consumer Price Index (CPI) as a basis for indexation. Calls in the past for tying the minimum wage to a percentage of average annual hourly earnings have often focused on a rate of around 50 percent of the average annual hourly earning in manufacturing. The virtue of this approach is, of course, the historical precedent, because the minimum wage did hover around 50 percent of average annual hourly earnings for much of the history of the minimum wage program. Were the minimum wage to be set at that level based on the average for 2012 of $24.47, the minimum wage would be $ $12.23, as opposed to its current level of $7.25. Subsequently, whatever percentage the average annual wage increases by, the minimum wage increases by the same percentage.

The CPI is often favored because other programs, especially federal entitlements, are already tied to it. This has the obvious benefit of raising wages by whatever percentage increase there is in the CPI. The CPI, however, may overstate the rate of inflation and not accurately reflect market-caused price increases. An index that increases wages at a rate greater than (or even different from) the actual inflation rate will exacerbate inflationary pressures.

An argument can be made for a productivity based index on both moral grounds and the standard model. According to the standard model, when productivity increases it is because of the marginal value each worker added to the enterprise. By theory, increases in productivity should justify increases in wages without any risk of inflation. Remember that the standard model holds that increasing the minimum wage will either lead to lower employment or higher productivity. Since the end of the Great Recession in 2009 productivity has increased, but those gains have not been shared among the workers. Tying the minimum wage to productivity would ensure that those productivity gains are shared among the workers. This approach assumes that as productivity increases, and to the extent those increases yield higher wages in general, they can also be the basis for increases in the statutory minimum wage. A minimum wage that rises with increases in productivity would have its appeal both economically and politically.

One approach to a productivity index might be to create it on the basis of the median wage of the lowest wage workers, who would in effect be regarded as low-skilled workers, many of whom work in retail sales, the low-wage service sector (cashiers, gas hands, etc. ) and the fast food industry. Then on the basis of changes made to the median of the lowest-wage sector, similar adjustments would be made to the statutory minimum wage. Whatever percentage increase there was in the putative minimum wage would simply be applied to the statutory minimum wage.

According to data from the Current Population Survey, the median wage of full-time workers below the 50th percentile was $3.74 in 1982 and it was $12.02 in 2012. Over the course of three decades median wages rose 221.4 percent. Had that same percentage increase been applied to the statutory minimum wage (then $3.35), it would have been $10.77 in 2012. The point is that it would have risen through incremental steps rather than the divisive politics that tend to characterize the current minimum wage regime. With incremental steps, employers can at least plan.

Many of the states have come to the conclusion that if the federal government is not going to raise the minimum wage and then index it, they will have to take on that responsibility themselves. As of the end of February 2015, 29 states, including the District of Columbia, have minimum wages that are higher than the federal minimum wage. Sixteen of those 29 states have some mechanism for automatic adjustment On one level, that states are taking the lead only proves Justice Brandeis’s classic defense of federalism that states are laboratories of democracy whereby state policy can serve as a model for federal policy. But on another level, it demonstrates that the federal government can no longer be counted on to take the lead and be the great equalizer.

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