A quick prelude before we dive into an economic policy debate on minimum wage:
In monetary news, for a hot second, markets are in the middle of a tiny meltdown over what was perceived as a "more hawkish" Fed after their June meeting this week. What made the Fed more hawkish, you ask? Well, every member is asked, at every meeting, to throw a set of darts at a board. One dart for where they think rates will be at the end of 2021, one for the end of '22, one for '23, and one for "longer term". The median dot for the end of 2023 moved up to 0.625% from 0.125%, implying two rate hikes.
Sorry, we meant "two rate hikes!". Note the breathless exclamation point of excitement/concern/alarm.
So in the face of continuing supply chain disruptions and mounting (possibly transitory) inflation pressures, the Fed says, on average, we can expect two rates at some point 18-30 months down the road (because note: the median dot for year-end 2022 is still zero). In the meantime, still no taper on COVID-initated QE of $120B per month until "substantial progress is made", so…$120B times 18 months equals….$2T+ of more QE coming into the markets over the next year and a half with no projected rate hikes? BTFD. And pray that the current inflation is actually transitory. Seems a perfectly good reason to slam commodities and precious metals to us! (nb: sarcasm).
In fiscal news, there's a looming benefits cliff (again), as the federal unemployment assistance is set to expire (again), this time in early September. If it doesn't get renewed (again). Half the states have already chosen to end the expanded federal unemployment benefits early, based largely on the argument that people are getting paid more (via expanded unemployment benefits) to stay at home rather than go get a job, which is having a negative impact on those states' economies.
That argument is not wrong. Look at every single business struggling to hire employees coupled with the 15 million people filing for unemployment benefits. Or, to put a finer point on it, job openings have increased by about 50% since late-December, while over that time period the number of people on pandemic unemployment programs specifically has stayed the same.
So yes, it's time to wean off the pandemic unemployment assistance programs before we get saddled with yet another crisis-spawned, perpetually bloated government expenditure program.
But it's also time for a $15 minimum wage.
Serendipitously, the BLS estimates current (pandemic expanded) average unemployment benefits at $600 per week, which is enough to keep people at home and not working. Assuming a full-time job at 40 hours per week, that works out to….$15 per hour. And yes, we know that there's no real argument there, it's just some fun with numbers.
Our actual argument begins with the following premise: A full-time job should pay a living wage.
Let us define "full-time" as the commonly-accepted 40 hours per week. "Living wage" is a bit more slippery to define, but should not mean "living whatever lifestyle one may want". Listening to HFT CEOs talk about "just trying to make a living" in the wake of the January GameStop shenanigans made us throw up in our mouth a little bit. A living wage should clearly not, as an extreme example, afford rent in the Upper East Side or a summer house in the Hamptons. Similarly however, a living wage should also clearly not require overtime or a second job in order to cover the basic necessities of food and shelter.
The $15/hr level seems fairly arbitrary, but is the level that has been chosen by the various lobbying and advocate groups ("Fight for Fifteen" does sound better than "Struggle for Sixteen" or "Melee-Eighteen" we suppose), so let's run through a thought experiment on what $15/hr looks like:
$15/hr at 40 hours a week for 52 weeks in a year is an annual salary of $31,200 gross. 7.65% of that is payroll taxes that never get seen, so you're left with $28,813. Back out another $1,050 for average cost to workers of employer-sponsored HMO healthcare plan and you're at $27,763. The IRS will take $1,644 in income tax (after the standard deduction), so you're down to $26,119. Let's use good financial planning principals and assume one-third of gross income goes towards housing. On $31,200, that's $858 per month.
$858 will, on average, get you a one-bedroom apartment in Newark, St. Louis, Cleveland, Omaha, Kansas City, Milwaukee, Louisville, Memphis, Detroit, Albuquerque, etc. It would get you roommates in Pittsburgh, California, New York, Boston, New Orleans, Florida, Minneapolis, Denver, Atlanta, Seattle, Portland, Baltimore, Nashville, DC, Charlotte, Austin, etc.
On the face of it, we'd say that seems to pass the sniff test for appropriateness in housing.
So after taxes, healthcare (just the premiums, not counting out of pocket costs), and housing (ex-utilities), we're down to $15,823. Let's also assume that a living wage provides for 5% savings - it's a living wage, after all, not an indentured servitude wage. That's $1,560 per year, meaning you've got $1,188 per month for everything else: transportation, utilities, food, clothing, entertainment, etc.
Again, that seems to pass the appropriateness sniff test. It's not enough to make a monthly car payment on a new BMW, but it will get more than a used Saturn with the transmission falling out. It won't let you eat out every meal, but will cover a reasonable grocery bill that is more than just Easy Mac and Cup Ramen. It'll also cover a basic phone and wireless, but not the latest and greatest iPhone/Galaxy Note and Gig speed with 300 cable channels.
In short, $15/hr seems to provide what we would consider a very reasonably defined "living wage".
The counterargument to raising the minimum wage is slightly amorphous. It is generally expressed through the negatives of higher prices and pulls in, to varying degrees, the tangentially related topics of UBI, inflation, job loss via automation, and free markets. However, none of these are entirely appropriate.
A minimum wage (of any level) is tautologically the opposite of a universal basic income. In fact, the higher the minimum wage, the lower the "welfare cliff" and the more incentive people have to become productive members of society.
Similarly, an increased minimum wage would not result in "inflation" per se, inflation being defined as an increase in prices over time. An increase in the minimum wage would increase the labor costs for a company which could, assuming that cost gets passed on to consumers, result in an adjustment of prices higher. But this is more of a "resetting" than actual inflation. Once prices are adjusted to the new level, there is no expectation that they would continue to increase with a constant minimum wage.
In point of fact, the cost of labor as a percentage of revenue (blue line below) has been lower in the last 15 years than at any time post-WWII while profit margins (red line) are still near all-time highs. (For those interested, the collapse in labor as a percentage of revenue seems to coincide with the onset of the Fed's ZIRP policies post-2009. How about that.)
So the idea that increased labor costs at the low end has to necessitate cost of goods increases isn't actually a hard and fast rule. It usually happens, as companies generally try to protect profit margins, but the ability of a company to raise prices is also highly dependent upon competition, demand elasticity, and various forces unique to its industry and consumer trends at the time.
The job loss via automation counterpoint is compelling, but we would suggest not entirely relevant. If you increase the minimum wage to $15/hr, you could actually see a reduction in job availability, as McDonalds (for example) replaces all human cashiers with machine kiosks that cost less than $15/hr.
This is entirely valid, but feels to us more like the ever-present argument against change in the workplace rather than a valid point against a higher minimum wage. For a fun read, here's an article out of Denver from 1985 discussing the loss of train cabooses to electronic boxes. See if the arguments ring a bell.
Furthermore, the job loss argument is really more of a can-kick. Not raising the minimum wage will make humans cheaper to employ than machines, yes...for now. But that automated kiosk that would replace a $15/hr worker today will be replacing a $7.25/hr worker in three years. Which is why we consider the automation argument more relevant to a discussion of the education system, really, and proper workforce training than a valid argument against a minimum wage increase.
The free markets argument is also slightly off-base as we don't have an entirely free market capitalist system in any respect, and it makes assumptions of elasticity and utility that research suggests do not hold when at or near the poverty line - clearly the demographic an increased minimum wage is intended to benefit.
We wrote about some of the issues with our current system of capitalism last year, as the top tiers of our economy again got bailed out by the Fed (leaving the risk to the lower tiers). The upshot was that early reforms to capitalism were about limiting exploitation of the working class in pursuit of profits, and it was time now for reforms that limited exploitation in avoidance of losses. While that conclusion is not entirely germane to a discussion of raising the minimum wage, some of the chart material highlighting the disparities of today's capitalism are worth repeating.
Accounting for inflation, wages for the bottom 20% have barely budged in the last 50 years, which is a distinct change from the decades before that:
And interestingly, had wages and productivity maintained their close relationship through the years, the minimum wage would be about $18/hr today:
A $15 minimum wage seems to us like a fairly straightforward step towards reducing the size of government, reducing government deficits, reducing the widening income inequality gap, increasing economic output, and making some much-needed changes to our current system of capitalism.
Any arguments to the contrary are welcomed.
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