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  • Writer's picturePhilip Ammerman

In Favour of Minimum Wage

I learned this morning of the failure of the $ 15 minimum wage proposal in the Senate.

I am not surprised. We are in the middle of a pandemic, and there has been little time to study the impact of such a law.

There has been no attempt to build a consensus with employers or other stakeholders, and of course this would be difficult in the best of times.

Increasing the minimum wage will also increase employer social security contributions of 6.2%, making the overall labour cost increase even higher.

And, we have just recorded a record trade deficit of $ 682 billion in 2020. Any short-term attempt to raise the domestic minimum wage will make exports even less competitive than they already are.

The CBO has modelled the effects of raising the minimum wage to $ 15.00 here. Be aware that their overall perspective is limited to the budgetary impact of raising the wage.

I’ve modelled the impact (without social security costs) of the Fair Wage Act for the main cohort of wages.

Assuming a 40 hour work-week and an average working year of 50 weeks, going from the current $ 7.25 per hour to $ 15.00 per hour will lift average annual wages from $ 14,500 per year to $ 30,000 per year within 6 years.

The current poverty guideline for 1 person is $ 12,490, while the current median national income for 1 person is $ 35,977. So this is a significant step upwards.

But what does this mean for employers?

First of all, many small employers will be faced with an existential problem of layoffs, or closure, or both. Most farms, small retailers, small restaurants, etc. are not operating at huge profit margins. Most of them only survive because they are family owned-and operated, and the family members either work double shifts and/or without pay. So, I expect a wage of layoffs and a wave of small business closures.

Second of all, larger companies (especially in mass-market service sector industries like retail or restaurant chains) will probably adjust any existing higher wages downwards to match the 6-year increase in the Federal minimum wage. While there will be a net gain in the lowest wage rank, their first objective will be to adjust overall wages so that there is no added wage burden. This means that higher-paid staff will see wage cuts.

This is because there is a delicate line between those employees at minimum wage, and the employees further up the ladder in terms of experience and hierarchy. Many employers are not worried by the impact of the minimum wage on minimum wage workers, but what happens to salaries further up the line.

Third of all, I assume that many employers will create a larger category of temporary jobs. This mirrors the experience of high cost, permanent employees in France and the UK.

This inevitably creates two classes of employees: permanent contractors (with social insurance and work protection benefits) and then gig economy workers with no protection. A third class would be illegal or undeclared workers.

Any labour and wage agreement needs to be able to address these tendencies. Raising wages in isolation will not be enough.

Finally, I assume that many employers will accelerate the trends towards automation and labour saving. So, more robots. More offshoring.

My proposal would be the following:

The average length of a business cycle in the United States is about 4.7 years.

I propose increasing the Federal minimum wage from $ 7.25 per hour to $ 10.65 per hour by 2025. Assuming a 50-week year, that increases single-worker annual income from $ 14,500 to $ 21,300, which is also close to the current median poverty level for a family of 3.

That is a massive 47% increase in the monthly average wage over 5 years.

This is enough time for the average employer to be able to design and test response strategies in his / her business.

This is also enough time for any potential inflationary impact to be dampened over the course of 5 years. (Although this is far from certain).

At the end of this time frame, take a pause to evaluate in depth the impact on employment, wage rates and poverty. Then figure out the next steps.

Even this limited proposal is challenging. Neither our society nor our workforce nor wider economic model is ready for such a step. We would be taking it at a time when our trade deficit, budget deficit and public debt have reached record levels. And when COVID-19 has destroyed small business.

And, we would be doing so at a time when there is zero consensus on what the national strategy of the United States should be, in anything. We don't really have a national manufacturing strategy worthy of the name (which is being implemented). We don't really have a labour competitiveness or ups killing strategy.

Our exports are dominated by agricultural products and services: this wage increase would make both categories less competitive.

And we have no strategy for debt reduction and public sector competitiveness.

Solving the minimum wage is not going to solve problems of poverty, poor governance, institutionalised racism, low labour productivity, and the myriad other problems affecting business and labour in America. But it would be one place to start.

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