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MN2020 - Arguments Against Indexing Minimum Wage Fall Flat
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Arguments Against Indexing Minimum Wage Fall Flat

March 10, 2014 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Legislative negotiators appear to agree on the need for a $9.50 minimum wage. However, they continue to lock horns over “indexing”—the practice of adjusting the wage annually so that it keeps pace with the cost of living. Indexing is essential to keep the purchasing power of the minimum wage from eroding over time. Ultimately, arguments against indexing fall flat.

The first of these arguments is actually more of a sound bite than an argument. According to a business lobbyist quoted in MinnPost, indexing is the equivalent of putting the minimum wage on “auto-pilot”—meaning that the minimum wage will automatically increase every year by an inflationary adjustment. Under House File (HF) 92—the bill preferred by Minnesota minimum wage advocates and currently under consideration by state legislators—the cost of living adjustment would equal the annual growth in the Consumer Price Index (CPI) or 2.5 percent, whichever is less.

Indexing certainly does allow for increases in the minimum wage over time, but it is hard to see how this is a bad thing. The price of everything that working households need—from food and clothing to medical care and housing—increases over time; not adjusting the minimum wage for growth in these costs will guarantee that the financial well-being of these households will deteriorate and many will slip deeper into poverty. It is hard to see how this is a conscionable course of action.

It is important to remember that freezing the minimum wage is also an “auto-pilot.” Under this auto-pilot, the minimum wage remains locked in place until public pressure builds on policymakers to raise it.

The “frozen wage” auto-pilot is bad for low-wage workers whose purchasing power will decline over time, bad for the economy due to declining demand for goods and services resulting from this loss of purchasing power, bad for politicians who will once again go through the meat grinder of public negotiations over what to do about the shrinking minimum wage, and ultimately bad for businesses that will see episodic spikes in wage costs due to periodic legislative intervention as opposed to the smooth, orderly, and predictable growth in the minimum wage under indexing.

The other argument against indexing is that it will force employers to increase wages even during a recession when profits are down and the ability of businesses to bear additional costs is minimal. This argument overlooks the fact that (1) growth in the minimum wage is linked to growth in the CPI and (2) the CPI tends to grow slowly during a recession. For example, CPI inflation during the depths of the Great Recession was actually negative, meaning that there would be no increase in the minimum wage for the year indexed to this period. During the entire period of the Great Recession and the subsequent lackluster recovery, the annual rate of CPI inflation was a scant 1.6 percent.*

Since 1980, annualized CPI inflation during recessions has been one-third less than during non-recession periods. Furthermore, there is a significant correlation between CPI growth and Gross Domestic Product growth, meaning that the rate of CPI inflation is generally low when economic growth is low. Thus, when economic growth is weak, growth in the minimum wage indexed to the corresponding period will also be weak. Consequently, there is little reason to fear rampant minimum wage growth during recessions. Even in the odd event that there is steep inflation during a recession, HF 92 caps the annual minimum wage growth at 2.5 percent.

For these reasons, it is unlikely that minimum wage indexing will contribute to job losses during a recession. To the extent that recessionary job losses occur, the likely culprit is generally a decline in demand for goods and services resulting from a drop of income, not a paltry increase in the minimum wage that will never exceed 2.5 percent. After all, few businesses would get rid of a needed employee because of a 1.5 to 2.0 percent wage increase (the projected growth in the CPI over the next few years), although they will drop an employee who is no longer needed because demand for the goods and services produced by the business has shriveled.

Rather than causing job losses, an annual inflationary increase in the minimum wage will help preserve consumer purchasing power during a recession, thereby blunting the real cause of recessionary job losses: a drop in the demand for the goods and services that businesses produce. By maintaining the purchasing power of low-income households, an inflationary increase in the minimum wage will provide a high bang for the buck in terms economic stimulus during a recession relative to other alternatives because low-income households spend a large portion of every dollar that comes into their pockets. All things considered, indexing the minimum wage to inflation will likely help preserve jobs during a recession.

Policymakers who support a $9.50 minimum wage but without indexing have embraced a perplexing position, which is essentially this: the minimum wage should be increased in order to recover the purchasing power of that wage lost to inflation, but in future years inflation should again be allowed to erode the value of the minimum wage and shrink the real income of low-wage households. The possibility of a future legislature stepping in to increase a frozen minimum wage is small consolation in light of the fact that the last time policymakers increased the minimum wage was nine years ago. If inflation over the next nine years is the same as inflation over the last nine years, a frozen minimum wage will lose nearly 20 percent of its purchasing power from 2016 (when the $9.50 minimum wage is likely to kick in based on the status of current negotiations) to 2025.

Indexing the minimum wage will provide a degree of long-term financial stability for low-wage Minnesota workers and will do so in a way that is more likely to preserve jobs than to cost them. Progressive state policymakers should side with economic justice and common sense by enacting a $9.50 minimum wage during the 2014 session and indexing it to the cost of living.

 

*Furthermore, if HF 92 had been in effect during this period, the average annual minimum wage growth would have been only 1.5 percent due to the cap in HF 92.
 

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2 Comments:

  • Elrond Hubbard says:

    March 13, 2014 at 9:03 am

    The indexing makes nothing but sense. The arguments against it are disingenuous at best, at worst outright lies.

    A fact that people seem to ignore, either by accident or on purpose (honestly not sure) is that our current economic situation in terms of purchasing power, household debt load, and decreasing opportunity for upward economic mobility to name a few, is due to the fact that wages have not kept pace with inflation since about 1980. Since that time, the ONLY group of people nationwide who have seen their wages increase at or above the rate of inflation are those who at minimum have completed some type of college degree (BA, AA, tech, etc).

    While this is could and sometimes is interpreted as ‘go to college if you want to have a nice life, junior,’ it completely ignores the reality that little more than 30% of working Americans have completed such a degree. The remainder are left with an ever shrinking balance in their checking account, at a time when more and more goods are being added to the basket of what’s considered ‘necessary’ (EG: one can live wo a cell phone or computer, but good luck being competitive in a job search in 2014 without either!)

    Moreover, there would be some initial sting in terms of employer costs and prices, but those would be absorbed fairly quickly, and the long terms benefits of increased spending power (in an economy that is ~70% consumer spending) would far outweigh the costs.

    Why is it bad? Because it increases the costs of businesses. What else is bad for businesses? That time when people have so much debt and so little disposable income that they cannot buy anything other than bare necessities. Who wins in that situation? Wal-Mart, Target, McDonald’s, and the like. What percentage of the workforce is employed by these type of companies? Whatever your guess is, lowball it a little more. In an economy that depends heavily on consumer spending, and is built by small businesses, the arguments against indexing minimum wages have literally no ground to stand on.

  • Bernice Vetsch says:

    March 17, 2014 at 8:43 am

    The argument against indexing seems to reflect the same attitude toward workers as the right-wing Bush era (and current among many) belief that poor people should take responsibility for their housing, health care and retirement expenses lest they become “dependent” on government instead of being self-reliant like those with more money are.