Financial FAQs

The debate on how to boost this economic recovery has now shifted to the federal minimum wage standard, now at $7.25 percent per hour. This is in part because the latest Census Bureau report shows 46.5 million Americans living below the poverty line—15 percent of all Americans.  Raising the minimum wage should be a no-brainer, as such a wage is nowhere near even the income level that sustains a household working normal hours.  For instance, the current minimum wage comes to $15,080 per year with a 40-hour week vs. $23,492 as the official poverty level for 4 in 2012, reports the U.S. Census Bureau.

But there is an even more important reason.  Higher wages translate to higher spending.  And it is consumer spending in the main that drives the demand for goods and services, with government lending a helping hand.  Higher wages also lowers debt levels, since consumers and government then borrow less. So-called capital investments, the third leg of GDP growth, accounts for much less activity.

The main argument against a raise in the minimum wage from conservatives is that it hurts job creation because fewer workers would be hired due to higher labor costs.

Really?  It’s true that labor costs generally average some two-thirds of product costs, but unit-labor costs are at all-time lows, while corporate profits are at an all-time high, as a percentage of Gross Domestic Product. 

Even MacDonald’s has given their employees advice on how to live within their means on their ‘minimum’ wage of $8.25/hr. But the recommended budget posted on their website includes no money for food, clothing, healthcare, or gas-transportation expenses, but leaves room for a second job.  And, rent can only be $600 per month, which will rent just one room in a California home.

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Graph: MilesCorak

It’s also true that the U.S. minimum wage is in 9th place of the developed countries with minimum wage standards led by Australia with its $16.37 minimum wage for fulltime working adults over 20 years of age.  The Australians are near full employment with their unemployment rate currently in the 5 percent range, by the way, lowest in the developed world.

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Graph: Econoday

            The so-called Employment Cost Index put out by the Bureau of Labor Statistics really shows how little American wage and salary workers are earning, vs. during more prosperous times. It is up just 1.8 percent year-over-year.

So why isn’t the importance of a higher minimum wage understood? Much of the misinformation has to do with the advent of Reaganomics, or supply-side economics theory in 1980, which says that a greater share of wealth should be diverted to investors and producers of goods and services over government and the wage and salary workers. This all in the name of new product innovation and greater growth.

But that has been proven wrong in many ways.  For instance, businesses didn’t invest more domestically in the early years of the Reagan administration with their lower tax rates and extra profits.

And though some 15 million jobs were created during President Reagan’s term with lowered tax rates, 21 million jobs were created during President Clinton’s term, when tax rates were raised again.  And just over 1 million net jobs were created during GW Bush’s 8 years, with even more draconian tax cuts while fighting 2 wars.

            The result of policies that have favored ‘supply-side’ policies since then is the top 10 percent of earners took more than half of the country’s total income in 2012, the highest level recorded since the government began collecting the relevant data a century ago, according to an updated study by Saez and Piketty.  And 95 percent of all income growth since 2009 has been garnered by the top 1 percent of income earners.

            So actual results show the need for a higher minimum wage. The 1 percent have not increased production or created jobs in the face of declining real incomes, so it is time to shift some resources back to those who actually produce the wealth.

California is doing that with its just passed raise of the minimum wage to $10 per hour phased in with $1 in 2014 and another $1 by 2016. This still comes to just $20,800 per year with a 40-hour week. So even that amount doesn’t reach the poverty level for for a family of 4 today.

Harlan Green © 2013

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