Compensation is in the news. Another initiative to increase the U.S. minimum wage was announced in President Obama's 2014 State of the Union address.
Once again, the President detailed the unacceptable nature of American income inequalities and declared that many changes are needed. No one protests that the status quo is ideal, but opinions about solutions vary. Many statements have been made. The loudest voices have been those of elected officials, government agencies, selected think-tanks and special interest groups. Their views have been widely shared by the media.
This year has witnessed a steady stream of stories promoting higher entry pay rates, discussions about “living wages” and studies about income mobility. News media have published a variety of articles on the importance of the wealth gap, too. Since the level of starting pay plays such an important part in the discussions about disparities in income and wealth, it should come as no surprise that the campaign for a higher minimum wage intensified to peak just before the State of the Union address.
Interestingly, Federal agencies have taken a lead position in agitating for a higher FLSA minimum wage.
The U.S. Department of Labor’s January 9, 2014 newsletter characterized Henry Ford’s 1914 decision to pay his assembly-line workers five dollars a day as a minimum wage decision. That was a strange comment, since the news from Ford itself says the 1914 raise did not extend to all jobs: but perhaps the misleading exaggeration makes little difference to the underlying principle being offered... that higher incomes create a cycle of increased general economic prosperity.
Nevertheless, the Labor Department's neweletter proceeded to say:
A century ago, Ford intuited what academic research has concluded in more recent years: that minimum wage increases have little to no negative effect on employment, reduce employee turnover, increase productivity and stimulate economic growth as low-wage workers have more money to spend.
They also asserted that academic research confirms the almost universal positive effects of a minimum wage increase which is now essential because buying power has slipped greatly in recent years.
The next DOL newsletter a week later said much the same things as before, with a number of articles calling for a higher minimum wage. When the third week in a row brought another newsletter repeating the unchanging theme again, even a slow learner like me began to detect a pattern.
Owners of hardware stores, delis, a record store and a nursery were among the small business representatives who sat down with Secretary Perez on Jan. 23 for a discussion on how raising the minimum wage would benefit low-wage workers and also their bottom lines, as well as the economy. "This is not the usual conversation you expect to have with business leaders," said Perez. "It's counter-intuitive that business owners would support an increase." Yet these men and women told the secretary that paying workers more leads to reduced turnover and a savings in training costs, better customer service, happier customers and more money to spend in their businesses and at other establishments.
An increase in the U.S. minimum wage might be good for the economy. It might not, also. Economists remain divided on the issue, with positions apparently shaped by political leanings. Readers here are invited to investigate primary sources and come to their own conclusions about claims and counterclaims. Research findings cited in various published sources usually reflect the preferences of the report's sponsor, with each group declaring its own version of reality. Guess it also makes sense that federal agencies will faithfully argue for legislative changes supported by their executive branch.
Perhaps I should not find it disturbing that a government department like DOL pushes for new laws to enforce; but it somehow seems improper. If the Pentagon publicly agitated for invasions or for immediate disengagement from war zones or if the Immigration department announced its support for either open or closed borders, critics would say they were out of line, trying to influence policy-setting rather than following the policies set by others. Perhaps this is different.
The outcome of the latest minimum wage debate may be determined for political reasons rather than due to economic causes, anyway. Guess no one should be surprised by that, but we better be prepared to live in interesting times.
E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. After over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), serves on the Advisory Board of the Compensation and Benefits Review and will express his opinion on almost anything.
Image courtesy of ketknbc.com
Great article. I actually heard an interview with Secretary Perez this week on the radio. He also quoted the example of Ford. I take issue with this example. Ford used this as their compensation strategy as a means to attract, motivate, and retain their employees. They were willing to pay above the market value for their people because they wanted the best and wanted to keep the best. If the government had mandated that pay level, Ford would have had no competitive advantage, as their workers could have gone to work for any other employer and receive the same wage. When private business pays above the market, it will create a shortage of employment at that wage, creating competition and allowing Ford to choose from the best.
If my memory of fundamental economics is correct, implementing a price floor that is above the equilibrium price of labor will cause a supply of labor that is greater than the demand for labor. This causes a labor surplus and limits the number of jobs available.
The number of people working for minimum wage suggests that the equilibrium price for labor is already lower than the current federal standard. Although it would never happen, lowering the minimum wage would create more jobs, opportunity, and would lower unemployment figures. Many of my friends are still in school and live in college towns where there are not enough jobs. If there were no minimum wage, they would certainly work for $6.00/hour to earn a few extra bucks. More companies would come to town to hire this cheaper labor, more profits for these companies, more jobs, more taxes, more money pumped back into the economy, etc.
The issue of stagnating wages is certainly a problem, but if past increases in the minimum wage haven't solved the problem, how can the argument be made that it will be different this time?
Posted by: David Scott | 02/07/2014 at 05:17 PM
Any argument may be made, David. Don't know the answer, but I have heard the phrase, "the triumph of hope over experience."
Posted by: E. James (Jim) Brennan | 02/07/2014 at 05:35 PM