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The Battle Over the Minimum Wage
Tags: Politics; Wages

One of the biggest holdovers from the valiant White House run by Senator Bernie Sanders is the adoption of the "Fight-for-$15" effort to more than double the federal minimum wage to $15 per hour. What at one point seemed to be nothing more than an idealistic push towards equality was officially adopted by the Democratic National Committee Party Platform during its convention in late July and has now become a major point of contention between Senator Hillary Clinton and Donald Trump.


The fact that the two sides disagree is not a surprise. Democrats generally favor a higher minimum wage than Republicans do. They believe that employers are putting increasing demands on laborers with little to no financial reward, and are, in some cases, paying what everyone would probably agree is a starvation wage (full-time minimum wage equates to just over $15,000 per year). They champion the effort to provide every American who is working full-time with a living wage, and are currently pushing that at the $15 per hour level.


It is important to note that this is a substantial increase over the Democrats' previous positions on the issue. In 2010, President Barack Obama proposed an increase from $7.25 to $10.10 in three annual $0.95 increments (it was promptly voted down by Congress). Secretary Clinton began this campaign season pushing for a $12 minimum wage but was pushed higher by the Sanders campaign during their negotiations.


Republicans, on the other hand, are less enthusiastic about increasing the minimum wage. Let's be clear about is not because they think it is acceptable that hard-working Americans be paid a starvation wage. It is because Republicans generally believe that proper minimum wages are set at the state and local level and not by the Federal government.


Economists have long disagreed about the impact of minimum wage increases. Though, to be fair, those disagreements are based on small increases. When it comes to sweeping changes to the minimum wage, economists across the political spectrum agree that major increases would have a negative impact on the economy. 


The risk here lies within the significant differences in personal income and cost of goods across the country. A study just released by the Bureau of Economic Analysis reported on the regional impact of these price parities (or lack thereof). Not surprisingly, the most expensive places to purchase goods ranged from California (where the "Fight-for-$15" movement started) to New York, New Jersey and Hawaii (they import everything). On the other side of the equation, states like Mississippi, Arkansas, South Dakota and Kentucky were the most affordable places to purchase goods and services, 24% lower than their "most expensive" counterparts.


It is this disparity that leads economists to cringe at the idea of a $15 minimum wage. It has been a long accepted principle of economic theory that there is an important relationship between the minimum wage and average personal income. There is even a ratio that measures that relationship, called The Kaitz Index, and a generally accepted rule that the minimum wage should be approximately 50% of average personal income.


In a state like Mississippi, for example, a $15 minimum wage in Mississippi would increase the minimum income to almost 88% of the average state-wide income. Doesn't take a rocket scientist to see why economists would view that as unsustainable. That would be akin to a $29 minimum wage in Washington, D.C or a $26 minimum wage in Massachusetts.


It sounds great, but think about the impact. While Democrats are likely correct to argue that major corporations, where the disparity between incomes at the top and down on the front lines are greatest, could survive large increases, Republicans are equally accurate to argue that small businesses would have a hard time staying competitive and profitable with such an increase. And even with the companies that could survive major increases to the minimum wage, it seems unlikely that they would simply raise wages without cutting expenses in the form of layoffs.


So then why would Democrats push for such steep federal increases? It certainly has a lot to do with the fact that only one state, West Virginia, has raised their minimum wage to a level ($8.75 per hour) that the Kaitz Index would consider acceptable. The truth of the matter is that while 29 states have raised their minimum wage beyond the required $7.25, that leaves 21 states which have a minimum wage that equals the federal amount, is lower than the federal amount or does not have a minimum wage at all. So to the extent that it has been left to the states, the states have not acted sufficiently, making it time for the federal government to raise the ante.


The moral of the story is that while minimum wage might be a hot button topic in this election, the results, one way or the other, are not likely to make a major impact.


It will always be hard to find a wage that works for every area of a country as big as ours. Everything, from the cost of a house to a gallon of milk is incredibly regionalized. While the economy could certainly support a reasonable and methodic increase to the federal minimum wage, the states are going to have to take it upon themselves to raise wages within their respective borders.


Oh, and while it might seem like we should all pack our bags and move to Mississippi to take advantage of the low cost of goods, we have to remember that income plays a role here too. And there, Mississippi falls off the bottom of the list. My suggestion.... If you are looking for the happy medium, where wages are as reasonable as the cost of goods and services, then I would look towards Maryland, New Hampshire or Minnesota and find a good real estate agent on the way.



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