Is indexing minimum wage to inflation a good or bad idea?

Great Debates
21

Given: The minimum wage can be too high or it can be too low. Either of these is a problem.
Given: There is some value, or range of values, in between where it’s not a problem.
Given: Where this optimum value or range of values is might depend on economic conditions.
Given: It is possible for legislators to somehow determine the (or a) good value for minimum wage, but it takes time.

If we accept all of these givens, then it follows logically that the minimum wage should be indexed for inflation. If you don’t, then inflation is guaranteed to eventually get you to a point where it’s too low. You’re not going to get legislators to pass a new bill every year to increase the minimum wage by 3% or whatever inflation is.

Now, it’s possible that the legislature got it wrong the first time, and set the rate too high. It’s also possible that they set it right at first, but that changing economic conditions (an increase in automation, say, or emergence of overseas economies) have resulted in it becoming too high. Or, of course, it’s possible by the same token that it turns out to be too low. But both of those circumstances are less common than the routine inflation that happens continually. It’s in those special circumstances that the legislature should change the value manually, and just let it go through the routine changes on autopilot.

EDIT:

You regard it as a problem that the Baby Boomers are all retiring now? Should they not be allowed to?

22

“Historic lows”? What about half a century ago, when most women did not work? And do you account for the record number of today’s Americans beyond retirement age? And what about employment during the early 1930’s?

If you think your underlying point is worth discussing, come back when you can present it without false statistics or hyperbole.

23

I’ll pull some actual labor numbers after I walk the dog. Iirc workforce participation is down, but not by much.

24

Ok the dog is walked. Juicy BLS datas:
Civilian labor force participation, percent: http://www.bls.gov/emp/ep_table_303.htm
Civilian labor force, number: http://www.bls.gov/emp/ep_table_304.htm

I prefer to look at the 25-64 population as a core group. That helps avoid affects from students and retirees. BLS doesn’t call that out separately, but some quick arithmetic gives us the following participation rates (2024 is a projection):

1994: 79.3
2004: 78.9
2014: 76.9
2024: 77.6

Sample calculation for 1994:

131,056 16+ labor population
3,140 65-74 labor population
694 75+ labor population
21,612 16-24 labor population

105,610 25-64 labor population

Out of a 25-64 civilian noninstitutional population of 133,253 gives us 79%.

25

Anyone who can get 10 times the old minimum wage, will be able to get 10 times the new minimum wage. When the price of unskilled labor rises, the price of every other category of labor will rise soon afterward. And soon after that, the prices of everything they produce will rise. You have changed the measurements from inches to centimeters, but you have not changed the things being measured. Raising the minimum wage lets people congratulate themselves on their compassion, but in the long run, it is an illusion.

26

The minimum wage in the UK is set far to low and is seen by many firms as the max. that they will pay. The fairest way would be to set it at 50% of the average wage

27

How do you figure? What mechanism would push up that worker’s wages?

28

It’s what I call the “bucket brigade” theory.

Say there’s 100 employees in a company and 100 different salary levels

Line them all up next to each other, #1 is the minimum wage guy and #100 is the top paid guy.

The minimum wage goes up.

#2 looks at #1 and says, I deserve a raise too.

#3 says, if #2’s getting one, so should I.

Etc… etc.

29

OK, then, what mechanism would cause there to be such a “bucket brigade”? Why will there necessarily still be 100 different salary levels after the change?

It’s clearly not just the fact that everyone’s saying “I deserve a raise”, because everyone is saying that all the time with or without a minimum wage increase.

30

I’m not sure what you mean by the mechanism, but the theory is that #1’s job doesn’t change but he’s worth more. So in theory, everybody on up the line says I’m worth more today than I was yesterday. And the nice trick is the only thing it depends on is that the fact the MW went up is a known event.

It’s bullshit. It just gets trotted out sooner or later every time MW is discussed.

31

The same mechanism that gets him/her higher than MW now.

32

If a Wal-Mart employee only has enough skills to make minimum wage and must rely on public assistance, how is that Wal-Mart’s fault? Should Wal-Mart, or any business owner, shoulder the burden of providing to a person above his market wage? If an employer hires an employee, that is simply an exchange of labor for payment of market value of that labor, not an agreement to take the employee on as a ward. If Wal-Mart fires the guy and thereby pays him $0/hr, does that make Wal-Mart better?

IOW, why is that Wal-Mart’s duty and not the taxpayers’ duty? It is not “corporate welfare” as it was never Wal-Mart’s duty to provide all of these things in the first place.

33

Wrong. Very wrong. A 10% rise in MW may cause some other prices and wages to rise 6%, while other prices or wages will rise 2% or less.

If you really believe that a 10% rise in MW causes all other prices and wages to rise 10%, please go back and re-read your elementary-school economic textbooks before conversing with adults.

34

To me it’s always made sense that it’s the change in taxes/minimum wage/any cost that has a negative affect of the economy. The derivative if you will. The change itself is always instant (infinite acceleration, infinitely small duration), and the larger the change, the more affected the economy would be. Over time, however, the general market will adapt.

As an aside, that’s what frustrates me about the idea to lower taxes. We’re already accustomed to paying the current rate, and the economic boom from a decrease in tax rate can only be short and temporary until the market adapts.

As far as raising minimum wage, I don’t think it should be indexed to inflation, but a known formula based on nothing but time and therefore can be expected and worked into the market. Markers tend to freak out about unknowns.

35

There are several states that already have indexed minimum wage. For example, Oregon and Washington have had it for several years now (Washington since 1999, Oregon since 2003). You’d think if it caused inflation, that would be measurable in the economies of those states. Has anyone tried to measure it?

36

It’s a fantastic idea IMO, whether it’s inflation or chained CPI or some similar measure. (But only one… the UK chains pension increases to the higher of three separate indexes.)

I think similar methods should be used for the pay of government officials, both elected and bureaucratic.

In Canada, politicians vote to raise their pay every few years. It always looks like they’re asking for too much, but part of this is the time gap between increases. If you haven’t had an inflation pay raise in 5 years, you could be looking at a 5-12% increase. Of course they probably do ask too much, so chaining their pay raises to inflation would limit excessive increases.

I’m a union employee, and we were just presented with a contract. The pay increase was below inflation… but I also noted that the previous contract was above inflation. In fact, every year we seem to get the same pay raise, whether inflation was below or above the usual percentage, for both this contract and last. I don’t know why we don’t just insist on at-inflation increases, in perpetuity, with no further negotiations on that required. It makes us look bad when we get too much, and causes pain when we get too little.

37

As I stated above, not only should some flexibility be allowed in prices or wages (esp. government-mandated prices) but I support a highish inflation rate (e.g. 3-6%) purposefully to improve the behavior of the wage s/d curve.

Suppose the anti-MW are correct and the MW hike will be inflationary. The “error”, such as it is, would work itself out after a short interval. However if the MW is tied to the inflation rate, a bad positive feedback arises — obviously wages and prices can push each other higher.

The right-mongers are wrong to exaggerate the danger — surely even in the dysfunctional Cruzian U.S., the kleptocratic fools will eventually turn to adults for leadership, hopefully well before Zimbabwe levels are reached :rolleyes: But it is an easily-avoided danger. Recall the strong concessions to UAW which hastened the collapse of U.S. manufacturing.

The right- likes to ridicule the left- as thinking money grows on trees, and a mandate with no escape valve (i.e. not the one inflation provides in the non-indexed MW) is a “dollar too far” in my conservative judgement. On this issue I will take the “(R)” position, if that’s what it is. I support a MW hike but do not want to see it tied to inflation.

To me it’s not clear at all what a “correct” wage would be. Europe provides higher wages than the U.S., especially if the full welfare system is considered. This seems well-founded in some countries, but not in Greece.

[QUOTE=nate]
To me it’s always made sense that it’s the change in taxes/minimum wage/any cost that has a negative affect of the economy. The derivative if you will. The change itself is always instant (infinite acceleration, infinitely small duration), and the larger the change, the more affected the economy would be. Over time, however, the general market will adapt.
… As far as raising minimum wage, I don’t think it should be indexed to inflation, but a known formula based on nothing but time and therefore can be expected and worked into the market. Markers tend to freak out about unknowns.
[/QUOTE]

In at least the last paragraph I agree with you — except to give it a completely different emphasis:
Sudden changes (e.g. to MW) can briefly jostle the market-place, but a good mareket should be able to quickly adapt. (Some fast-food buisness may sell out. Others may grow. Let the market work it out.)

38

As the owner of two homes I’m still paying mortgages for, I couldn’t agree more! Those inflation rates are higher than my interest rates are.

39

A market wage, by definition, is what the employer pays, and so has very little to do with the relationship of a wage to the value created by an employee. If an employee creates $20 worth of value, and the employer can get away with paying $10, that is $5 right to the bottom line - so the employer has incentive to keep wages low. In times of recession there are many candidates for the job so the employer can pay less - but this has nothing to do with value created.
As for WalMart specifically, they have recently announced wage increases (perhaps from pressure of lower unemployment, perhaps from being made to seem the bad guy in the media) so they could clearly always afford it.
However it appeared that workers in WalMart tended to decrease their output to be more in line with their wages, so paying more might actually help the bottom line.

40

Actually the MW would be raised no more than once a year, if that, while prices get raised all the time. If it was a problem, it would be a short term one.
Also, Social Security is indexed to inflation. Have any data that this causes more inflation?