Why minimum wage hikes are no panacea
As a resident of the Seattle area, I've seen firsthand the fight to help address income inequality by raising the minimum wage. At $15 an hour, it's the highest in the country.
Yet while a big bump in pay obviously can make a big difference in an individual worker's financial circumstances, raising the minimum wage likely offers much more modest benefits for the U.S. as a whole, says JPMorgan Chase (JPM) economist Daniel Silver in a recent report.
In all, 19 states this year have raised, or passed laws to increase, their minimum wage (Although there is a federal wage floor, now $7.25 an hour, states can set a higher minimum pay rate.) And while some of the increases were substantial, the problem is that a only a small share of U.S. workers earn the minimum wage -- something that perennial minimum wage target Walmart (WMT) has highlighted within its own stores. From a high of 15 percent in the early 1980s, only 5 percent or so of all hourly paid workers are at or below the federal minimum wage.
Don't get me wrong -- there are clear benefits to putting more money in people's pockets. A 2014 Congressional Budget Office report found that raising the federal minimum wage from $7.25 to $9 would directly increase earnings for low-wage workers by $9 billion and move 900,000 families above the poverty level. (It's worth noting that the CBO also concluded that such a pay hike could potentially reduce total employment by 500,000 jobs.)
That's because while those near the poverty line would get a total wage boost of about $5 billion, those earning six times the poverty level could see real incomes drop by $4 billion, ostensibly due to a drop in small business incomes. The pass through of higher labor costs, via higher prices for consumer goods and services, also plays a role.
So for the state-level changes to date, the effect is even smaller. Silver estimates that only a third of the U.S. population is affected by these wage hikes. And the average magnitude of the wage hikes -- which range from 1.5 percent in Florida to 20 percent in Arkansas -- was only about a third of the change studied by the CBO.
The good news is that an ongoing tightening of the job market suggests wages are about to drift higher on their own accord. Businesses are competing for qualified applicants in a way that hasn't been since before the financial crisis. The unemployment rate has fallen to just 5.6 percent, near most estimates of full employment and well ahead of the Federal Reserve's own forecasts.
In fact, the Fed's ongoing persistence in targeting a mid-2015 interest rates hike -- the first since 2006 despite slowdowns in Europe and Asia and a multitude of other worries -- stems from its worry that it's going to fall behind the inflation curve as wages rise.
So while forcing wages higher via legislation makes only a small, incremental difference to the inequality problem, the best solution is to continue to encourage private sector job creation and business confidence -- the benefits of which we're finally about to start enjoying -- and helping to normalize the multi-decade separation between labor's share of income and corporate profits that's driving the wealth and income inequality we're witnessing.
