Minimum Wage

Minimum wage is tricky, right? The Congressional Budget Office (CBO) estimates a minimum wage increase to $15/hr. would create 1.4 million unemployed while lifting 900,000 people out of poverty. What to do?

Financial analysts are quick to point out the hardship that small businesses will experience as a result of a minimum wage increase. Undoubtedly, higher wages will manifest in higher prices and hurt small businesses. The hardships experienced by these businesses, due to the higher wage, however, is a market signal that many of these low wage service sector jobs serve no vital purpose. We can live without them.

With sincere respect for the very hardworking employees and owners of restaurants, how many restaurants and other leisure and hospitality businesses do we need? Surplus labor ends up in this low wage sector which results in wasted human capital, unnecessary environmental destruction, and often leaves both producer and consumer of such services in a state of spiritual depletion and intellectual shortfall.

Among the defenders of the ruling ideology, a group no doubt exists, who would eliminate the minimum wage in its entirety and would be Ok with a market rate which falls to 5 or 6 bucks an hour, or whatever wage which would lead us to the equilibric bliss of full employment and stable prices. Those who disagree with this theoretical view are those who would end up working for 5 or 6 bucks an hour and those who would feel their pain.

It might be better to raise the minimum wage to $15/hr., allow portions of this frivolous service sector to fail, and then direct these workers into more meaningful public sector jobs or higher educational programs. Higher education programs should include a mix of liberal arts and technical training: the liberal arts for our civility and the technical stuff for our productivity. This, undoubtedly, would have positive long term effects.

But how do we pay for this? The solution is not as difficult as we are led to believe. Money can be created, directed, and destroyed in a manner which enables full utilization of our human resources, while protecting the environment. These are accounting problems: less so economic problems. Briefly, the U.S. Treasury creates money when it spends, it destroys money when it taxes; taxes and spending do not need to match and the gap between the two need not be filled with new debt. These are policy choices, not accounting necessities. This way of thinking is largely in line with Modern Monetary Theory (MMT)

The only real restraint against Treasury spending directed at full employment is inflation, this, the result of our operation within a monetary economy. However the ability to rapidly expand production to offset the increased demand associated with full employment should enable the nation to manage the inflation problem. MMTers argue the breach of real resource restraint is the thing which creates inflationary pressure. Given that the U.S. has a consistent pool of unemployed workers, a great deal of economic expansion can occur before increased demand for labor will create inflationary pressure.

It is possible, however, that inflation would occur long before this point. If the U.S. deficit expands, at a relative rate faster than other nations, the value of the U.S. currency will fall. Currently the U.S. currency is artificially supported by the excess demand for the currency due to its reserve status. But as the world divides into less connected trading blocks, demand for the U.S. currency will fall. Also, investor perceptions that the U.S. is over indebted, or has created too much money, will likewise reduce demand for the U.S. currency. This will weaken the value of the dollar. The U.S. dollar will not maintain its dominant reserve currency position forever; other currencies will increasingly encroach on this territory.

A weaker U.S. dollar will increase the price of imports and the cheaper dollar will put upward demand on U.S. goods and services which will put upward pressure on U.S. wages, all of which will manifest itself in higher inflation measurements. Whenever we hit the Federal Reserve’s 2% inflation wall, or thereabouts, the Federal Reserve (FED) will increase interest rates in order to slow the economy in order to halt wage growth. Under the MMT plan, workers who become unemployed due to the FED’s tightening will automatically flow into a federal jobs program. This full employment program, however, would undermine the FED’s money tightening, the very intent of which is to reduce the nation’s wage bill. If full employment of human resources at a livable wage does create inflation, then there must be another solution to full employment-inflation conundrum.

Keep in mind, we are trying to create an economy which meets the basic needs of all of its people, one aspect of which requires a minimum wage. There is seemingly a way to achieve this goal without creating inflation. Consider a company which we will call Company. Company has an overall wage bill and sells its product at a set price which produces a given level of profit. In order to maintain its set price and given level of profit, it needs to maintain its current wage bill. Low waged employees could be given a higher wage, but then, in order for the company to maintain its overall current wage bill, wages would need to be reduced among higher waged employees. This would maintain Company’s overall wage bill so that its product price would not need to rise, i.e., not experience an inflationary event. This hints at a broader solution.

The same result can indirectly be achieved at the macro level through higher progressive tax rates. Higher progressive tax rates which reduce the net income to higher income earners would enable the nation to increase the wage bill to lower income workers, thereby stabilizing the nation’s overall wage bill available for consumption, and thus eliminating wage push inflation. Production capacity for high income goods and services would migrate to the production of consumption goods and services needed to meet the expanded demand of the then higher waged low income workers. Alas, the full-employment-inflation conundrum would seemingly be solved. It is important to note that the purpose of a higher progressive tax rate is not to fund federal spending, but in order to control inflation through the stabilization of the nation’s overall net income wage bill.

The $15/hr. minimum wage combined with a program which shifts the consequent newly unemployed into meaningful federal jobs and higher education programs can be achieved in a non-inflationary manner through the reduction of consumption among current higher income groups which would be achieved through higher progressive tax rates. And, there is a bonus: the higher progressive tax rate would reduce deficit spending relative to other nations which, under our scenario, was the original source of the inflationary pressure. If the MMTers are correct as to their assumption that inflation would occur at a later point when full resource utilization has been achieved, then there would be no need for higher progressive tax rates.

Regardless of the solution, it is completely unjust to stabilize inflation and small businesses on the backs of impoverished workers. Better solutions do exist.