States push for higher minimum wage, while Washington stalls

A national debate rages about the minimum wage.

One side argues the current federal minimum of $7.25 an hour yields a family income below the poverty line.  On the other side, businesses argue they cannot afford to raise wages without raising prices and losing sales.

Each side can find reputable economists to support its position.  However, it’s easy to conclude that many economists make up their minds on the issue first and then develop studies supporting their views.

All of this goes on in a charged political atmosphere.  Democrats generally support increasing the minimum wage, while Republicans usually oppose any increase.

The federal minimum was last set in 2009 and has not kept up with even the relatively modest inflation since then.  Traditionally, the federal rate has only been revised when it had lost some of its purchasing power as the result of inflation.

Attempts to raise the federal level have failed, because the GOP has the votes to block any increase from passing Congress.  President Obama has issued an executive order raising the minimum to $10.10 for some federal contract workers.  The Labor Department said the order could affect hundreds of thousands of workers.

Many states set a minimum wage above the federal $7.25.  Maine’s is $7.50, but, with a referendum pending, it is likely to be raised.  Impatient with Washington inaction, some states have decided to phase in higher rates and automatically link them to the rate to inflation.  California just set its rate for 2022 at $15, the highest in the country.

Most economists agree on at least some characteristics of the minimum wage.

The income produced by the federal minimum wage will likely keep families poor.  They will seek public assistance to help meet their basic needs.  Higher incomes would reduce their eligibility for such assistance.

Businesses required to pay a higher minimum wage may reduce profits, raise prices, lay off workers or adopt a combination of these measures.

People receiving an increased minimum wage are likely to spend the added income rather than save it.  That should boost business, though not necessarily the same businesses paying higher wages.  

Increases in the minimum wage come so seldom that it lags behind climbing living costs caused by inflation, constantly eroding the buying power of low-income people.

And we can identify those jobs that are most affected.  Many of them are in restaurants among cooks and wait staff.  Women and young people are more affected than men.

Even if these points may be generally accepted, problems arise when economists try to measure the impact of each of them. 

At what point do higher wages result in fewer people being hired?  That point would show the value of labor, but it varies by the type of business and even by area.

How much do prices have to increase so that a business will lose sales?  For example, if the price of a specialty hamburger goes up from, say, $2.75 to $2.85, will people buy fewer of these burgers?

In fact, the biggest debate when it comes to proposals to raise the minimum wage is about the effect of increased labor costs on sales.  It may seem logical to assume that any increase in costs will result in a decrease in sales.  But that linkage may not kick in immediately, and it varies by industry.

Whatever the resolution of these questions, one aspect of the minimum wage has become more obviously in need of repair.  Right now, employers are allowed to pay less than the federal minimum wage to workers receiving tips – at a wage level that has not be changed since 1991.

Investigative reporting has found that some tips added into credit card charges never make their way to the intended recipient.  And there’s no sure way of knowing if the tip income makes up for the loss in wages unless employees report all their cash tips to the boss.

To end a system in which there are plenty of reasons to cheat, employees receiving tips should also receive the minimum wage, as is required in California.  That would help retirees be assured of fair Social Security benefits because of correct employer and employee contributions.

Federal Reserve policy seeks a two percent annual inflation rate to provide a cushion to keep a slowdown from throwing the economy into reverse with a loss of jobs.  Shouldn’t the minimum wage keep pace with this planned inflation?

Given the unresolved economic debate, the minimum wage issue calls for a political agreement on the correct current rate and then a permanent inflation adjustment that could finally halt the endless debate.