A Higher Minimum Wage is the Tonic America Needs

My Thoughts: Employment numbers are higher than normal, though coming down slowly, and the argument made by those who oppose this idea is that it will cause more unemployment. Some marginal workers will lose their jobs, but the ability of those who do not and instead receive higher wages will spur consumption. That will have a positive multiplyer effect far greater than the negative from those who lose a job.

The argument against the idea has been around since the ’30s. Tell me we have suffered greatly over these past 80 years as a result. It’s time to raise the level again.

By Edward Luce | The Financial Times

The argument for broad-based income growth is as compelling as it is watertight

Imagine receiving the following note from your boss: try to eat two small meals instead of one big one, sell your unopened holiday gifts on eBay for cash and please stop complaining – it is bad for your stress levels. That was what burger chain McDonald’s suggested in an amazingly thick-skinned memo to employees last week. All that was missing was a side order of fries. Welcome to life for a large chunk of the US workforce where a 40-hour week pays too little to take you above the poverty level.

Yet there are countervailing forces at work across many US cities and states. In the past few months, American voters have approved higher minimum wages by hefty margins. California and Massachusetts recently took it to above $10 an hour – way ahead of the $7.25 federal hourly minimum. Last month, a small corner of Seattle that includes the city’s main airport voted for a $15 an hour floor. The city of Washington looks set to pass a $12.50 an hour rate in the coming weeks. And President Barack Obama last week said he would support legislation to take the federal level to $10.10 an hour and thereafter link it to inflation.

For the first time in a generation, companies such as general retailer Walmart and McDonald’s are under real pressure to pay better wages. The arguments in favour of a significantly higher US minimum wage are strong. First, it would inject a much-needed stimulus into the anaemic recovery without involving a dollar of taxpayer money. Politics makes the latter impossible. Indeed, public spending on food stamps and long-term unemployment payouts is set to fall sharply at the start of 2014, which will undercut the recovery in US consumer demand (the lower your income, the more of it you spend).

The economic case is also solid. With the exception of Seattle, which may test the upper limits of what employers can bear, higher minimum wages should not lead to higher unemployment. Copious research shows that a reasonable increase boosts employee loyalty, which reduces payroll turnover and improves the company’s bottom line. In addition, it boosts local consumer spending, which lifts business revenues. Countries such as Australia, which has a minimum wage of US$15 – roughly twice the level of America’s – have lower rates of joblessness.

Second, full employment is no longer expected, let alone guaranteed, to raise the incomes of low-wage workers. With hindsight, Bill Clinton’s booming 1990s look increasingly like a blip in a generation’s worth of declining earnings for the bottom and middle of the labour force. Exactly half of US employees earn $26,000 a year or less. Had wage rates kept pace with rising productivity in the past 30 years, that would now be closer to $40,000 a year.

The market clearing rate – where supply meets demand – for a large chunk of the labour force is at, or around, the poverty level. “Just in time” inventory management has extended to just in time payrolls. In many sectors, not least restaurants, retail and other casualised sectors, where the bulk of new jobs are being created, employee hours go up and down in line with short-term shifts in demand. This transfers the risks of volatility in the business cycle from shareholders to employees.

Third, the US Federal Reserve may not be as willing to run accommodative monetary policy long into the business cycle, as it has since the 1990s. The new orthodoxy suggests the Fed should be prepared to tighten even before consumer price inflation rises too high if asset bubbles start to inflate. That is bad news for low-wage workers, who benefited from the Fed’s willingness under Alan Greenspan to keep rates low long into the business cycle expansion in the 1990s and beyond. Monetary policy is unlikely to reach as deep and as long into labour market recoveries as it once did. Rising tides no longer lift all boats.

The case for higher wages is close to watertight. However, activist groups do themselves little credit by depicting low wages as the evil designs of specific companies such as Walmart and McDonald’s. The city council of Washington recently passed a bill aimed at raising the minimum wage solely for Walmart employees to $12 an hour while keeping the $8.25 rate for other retailers, such as Target. This may satisfy the unions, which have reasons to hate the Bentonville-based multinational. But it would do nothing to lift incomes generally. Walmart made a profit of $17bn last year on revenues of $469bn – a 3 per cent margin. If it were forced to pay its workers more while rivals were exempted, it would quickly shed jobs. Only a general floor makes economic sense. Vincent Gray, Washington’s mayor, wisely vetoed the bill.

Next year is likely to be a moment of truth for the economy. The contractionary impact of the last three years of federal budget cuts is set to peter out. And the Fed will almost certainly start to taper its quantitative easing programme – possibly from as early as next week. Can the US finally experience catch-up growth in 2014? Or are we stuck in the annoyingly termed “new normal”?

Nobody is sure of the answer. But without broad-based income growth, no recovery can be self-sustaining. By large margins, both Republican and Democratic voters support higher minimum wages, according to opinion polls. Their instincts are impeccable. Pretty much all the evidence is on their side.