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MINIMUM WAGE LAW

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Obama said that anyone who works full time should not have to live in poverty.  Democrats and most Independents agree with raising the Minimum Wage Rate.   However, Republicans argue that raising the Minimum Wage Rate will put people out of work.  This has been a widely studied economic question and the result of all of the studies is that there is no clear answer. The labor market is complex and there is no consensus as to what causes unemployment.  Current macroeconomic theory offers some reasons such as social or labor contracts (sticky wages), efficient wage theory, imperfect information, and minimum wage laws.  More details can be found in Macroeconomic text books.

Adam Smith in his 1776 classic on economics, “The Wealth of Nations”, recognized that increasing real wages leads to the “improvement in the circumstances of the lower ranks of the people” and are an advantage to society overall.  Smith advocated that labor should receive an equitable share of what labor produces.  He reasoned that as wages rise as a result of higher productivity, societal growth will occur thereby increasing the quality of life for the majority of the members. As Adam Smith described and since 1952 when records of productivity were first kept, wages increased with productivity until 1973; however, since then worker productivity increased by 80% while wages have only increased by 10%.  Wages should catch up.  By matching the incomes paid to the poor and middle class to their productivity, they will consume more and this will increase demand for more goods and services and grow the economy which will, in turn, benefit the employers and owners.

This brings us to the question of what is a fair minimum wage rate.  The minimum wage rate should be set at equilibrium; which according to classic economics, equilibrium is the price of wages and condition when the supply of workers equals the demand for workers…there is no unemployment because the number of workers in the labor market will adjust to wages and the number of people who have chosen not to work are not considered unemployed.

If the demand for workers declines, it will initially create a surplus of workers above equilibrium and cause wages to fall.  This will reduce the number of workers who are willing to work because they don’t think the work is worth their effort; they put more value on their leisure time or other work.  Economic theory says that the current large number of long term unemployed workers will cause  the current wage rate to be substantially below equilibrium.

Conversely, If the demand for workers increases, it will initially create a shortage of workers causing wages to rise and increase the number of workers below equilibrium.  This will cause an increase in the labor market through either more workers entering the market or overtime work.  A shortage of workers will therefore increase wages and cause inflation.

The current labor market has a large surplus of 17 million unemployed workers.  Under a completely free market system, the employers would bring down the labor wage rates until either all workers have a job or the workers don’t want jobs at those prices.  With large unemployment which is caused by a lack of demand as well as automation and exporting jobs to low wage developing countries, there is nothing to prevent employers from unfairly driving down the price of wages to the same as developing countries.  The cost of living for our labor’s wages are much higher than in developing countries. That is why we need a Minimum Wage Rate to offset the free market.

A Minimum Wage Rate set by the government is designed to insure that labor receives a fair share of the employer’s income.  The minimum wage rate can either be set by the Federal, State, or Local governments.  The federal minimum wage should be based on a minimum level for all states and that some states with a higher cost of living may want to pass state laws for higher minimum wage rates.  Nineteen states currently have minimum rates above the current federal minimum wage rate.  Washington currently has the highest minimum wage at $9.19/ hour.

The proposed increase in minimum wages is from the current $7.25/hour to $9.00/hour in 2015 and will then increase with the annual COLA (cost of living adjustment).  Unfortunately, the problem with the current minimum wage rate is it doesn’t go far enough.  What is required is a wage that includes the minimum amount for shelter, nutritious diet, clothing, health care, and savings for retirement…and without public welfare for emergency healthcare, food stamps, and other public assistance.  A number of counties and cities have adopted a Living Wage which includes these.  The Living wage is substantially above the proposed minimum wage rate; for a full time worker the average Living Wage is $13.36/hour.  For a four person household, the average Living Wage is $16.50/hour.  Further studies may adjust the optimum minimum wage rate.

Living Wage laws have been enacted by many municipalities and counties throughout the country which require businesses that benefit from government contracts and other forms of financial assistance to pay wages above the prevailing minimum wage rates.  Living Wage Laws affect very few workers directly, but the realization that higher wages are necessary can have a spillover effect which helps bring up the wages for low income earners and set a higher standard for a future and more equitable federal Minimum Wage Rate.

This is a good time to raise the Minimum Wage Rate for several reasons: 1) the current core inflation rate is 1.6% and the Fed target is 2%.  Increasing minimum wage rate now can be more easily accommodated than during high growth economies when inflation would be a concern.  Wages account for 70% of our national income.  2)  The increased wages would increase tax revenue and therefore reduce the deficit; 3) the added wages to the low income would immediately be spent and help stimulate the economy; 4) the minimum wage rate sets a uniform standard so that some employers cannot undercut one another and therefore drive  all wages lower; 5) it may allow low income wage earners to save for retirement; 6) raising the minimum wage rate reduces income inequality, which is the worst since 1928; 7) higher wages typically result in lower job turn over, better morale, higher productivity, as well as modest reductions in poverty; 8) fewer food stamp costs and public assistance would be required — thereby reducing the federal deficit; 9) higher wages would allow for better quality family time; and 10) working students would require smaller student loans to pay for college.  The benefits of a fair Minimum Wage Law are overwhelming.

The proposed Minimum Wage Rate should be approved now, but it should be a minimum standard that is modified to meet the needs for the poorest areas. We should not deceive ourselves that the new Minimum Wage Rate is sufficient and therefore should plan for future increases beyond the COLA.  Further, raising the proposed minimum wage rate above $9.00/hour is necessary for many area with higher costs of living; however it may be necessary for the changes for individual cities and counties to be made with individual Living Wage Laws.



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