Consumer prices rose 5.3 percent in August compared to the previous year, causing some anxiety as the economy recovers from the pandemic. Food prices at home increased by 3%, while food prices away from home (i.e. restaurants) increased by 4.7 percent, according to the Bureau of Labor Statistics’ latest release this week. Rents and energy prices both increased by roughly 9%.
One point of worry for employers and employees in the United States is that activists frequently exploit inflation data to support their campaign for a $15 minimum wage, or even a higher salary of $23 per hour, despite the fact that study shows such steep rises will destroy millions of jobs.
Remember, if we kept up with inflation, the minimum wage would be $23/hr right now. $15 is a good middle ground. #RaiseTheWagehttps://t.co/44l6Rqln0F
Despite the fact that inflation has risen dramatically in the last year, the so-called “The Fight for $15” is still not based on a consumer price index. If the 2009 federal minimum wage increase to $7.25 per hour were indexed to climb with inflation, it would equal $9.22 today, according to Bureau of Labor Statistics data up to August 2021.
If the minimum wage were to be adjusted to the level in 1990, it would be $7.17 now. No matter how you slice it, these data don’t even come close to, let alone support, the $23 hourly rate proposed by the union-backed One Fair Wage.
Indeed, the $15 minimum wage goal that several states and municipalities have already enacted has no precedence in history. An organizing director for the Service Employees International Union’s Fight for $15 campaign joked about the absence of genuine analysis informing their main policy goal at one meeting, saying: “We decided that $10 was too low and $20 was too much, so we settled on $15.”
Unfortunately, these draconian minimum wage targets, which lack economic justification, will wreak havoc on firms and employees as they try to recover from the pandemic. According to the impartial Congressional Budget Office, the Raise the Wage Act of 2021, which proposes a $15 minimum wage nationwide, may cost the country up to 2.7 million jobs. According to economists from Miami and Trinity Universities’ industry and state-level analyses, the hospitality and restaurant industries would bear the brunt of these effects. Increases above the $15 minimum wage would have an even bigger negative impact on employer costs, and could result in the loss of many more employment.
What should be the new minimum wage?
Legislators submitted the “Raise the Wage Act of 2021” in January 2021, with the goal of raising the federal minimum wage from $7.25 per hour to $15 per hour by 2025. It would be the first hike in more than a decade, and the longest since 1938, if passed.
Many state and local governments have already established a $15 minimum wage, while the federal minimum wage has stayed unchanged. (In 2014, for example, Seattle mandated that employers gradually raise their minimum wage until it hits $15 per hour.) Seattle’s minimum wage will be $16.69 per hour in 2021.) Nonetheless, such a huge change at the federal level will undoubtedly be controversial and hotly disputed.
Advantages
Raising the federal minimum wage to $15 per hour would help low-income people improve their overall level of life. These workers would be able to cover their monthly expenses more readily, such as rent, car payments, and other household costs. “Today, a full-time worker cannot afford a basic, two-bedroom apartment in any county in the United States,” said Representative Robert Scott, leader of the House Committee on Education and Labor. Senator Bernie Sanders has also stated that the minimum wage should be $15, as he feels that full-time workers should not be forced to live in poverty.
A second, less visible benefit of hiking the minimum wage has been proposed: improved staff morale. Not only will happier employees make for a more cohesive and effective workforce, but they may also increase customer satisfaction. Furthermore, if employees are happy with their jobs and compensation, they are less likely to leave, which saves the company money on hiring and training.
Proponents say that raising the minimum wage to $15 will assist women and minorities. A $15 minimum wage would improve the pay of 31% of African Americans and 26% of Latinos. Furthermore, a disproportionate number of minority workers live in one of the 21 states with a $7.25-per-hour minimum wage.
Disadvantages
Small firms, according to opponents of raising the minimum wage, would suffer as a result of such a significant increase. An rise in the federal minimum wage will dramatically increase small businesses’ operating costs and tighten profits, just as they are beginning to recover from the international Covid-19 outbreak.
Raising the minimum wage to $15 would also boost daycare expenditures by 21% on average in the United States. In 2019, the average hourly wage for an early childcare worker in the United States was $11.65. As a result, a nationally enforced $15 minimum wage would nearly triple the cost of labor for childcare providers.
Advocates on both sides will continue to cite several reasons in favor of their viewpoints as the federal minimum wage debate continues to elicit passionate opinions. Those who oppose a minimum wage claim that market forces should be in charge. If there is a lot of competition for talented personnel, a business may have little choice but to raise salaries to keep staff. Employers and employees should be aware of both sides of the issue and prepare for a change in the federal minimum wage law that is almost certain to occur.
(This article was greatly aided by Logan Adams, a spring clerk in our Dallas office.)
Should the minimum wage increase in line with inflation?
- With current moves to raise the federal minimum wage to $15 per hour, raising the minimum wage has been an issue for decades.
- There are differing perspectives on whether increasing the minimum wage causes inflation.
- According to some economists, boosting the minimum wage artificially causes labor market imbalances and contributes to inflation.
- Other economists point out that in the past, when minimum wages were raised, inflation did not follow.
Why should the minimum wage be adjusted to account for inflation?
Indexing the minimum wage to inflation implies automatically increasing it to keep up with rising living costs so that minimum wage workers do not lose purchasing power each year.
Sixteen states, plus the District of Columbia, have passed laws requiring minimum wages to be automatically adjusted to reflect rising costs of living.
Arizona, Colorado, Florida, Missouri, Montana, Nevada, New Jersey, Ohio, South Dakota, and Washington are the ten states that now index minimum wage hikes each year.
Alaska (2017), Minnesota (2018), Michigan (2019), Vermont (2019), D.C. (2021), Oregon (2023), and California are among the states that will track minimum wage hikes annually in the coming years (2024).
The rest of the states, as well as the federal government, have yet to index their minimum wages.
Is it necessary to raise the minimum wage?
Raising the federal minimum wage will boost consumer spending, boost company profits, and help the economy expand. A little increase would boost worker productivity while also lowering turnover and absenteeism. It would also help the economy as a whole by increasing consumer demand.
What exactly is wage inflation?
Pay push inflation refers to an increase in the cost of products and services as a result of wage increases. Employers must raise the prices they charge for the goods and services they deliver to sustain corporate profits after pay increases. The overall increase in the cost of products and services has a cyclic effect on pay increases; as the total cost of goods and services rises, greater salaries will be required to compensate for rising consumer goods prices.
Why is it bad to raise the minimum wage?
Since 2009, the federal minimum wage of $7.25 per hour has remained unchanged. Increasing it would increase most low-wage employees’ earnings and family income, pulling some families out of povertybut it would also cause other low-wage workers to lose their jobs, and their family income would fall.
The Budgetary Consequences of the Raise the Wage Act of 2021 (S. 53), which CBO evaluated in The Budgetary Effects of the Raise the Wage Act of 2021, allows users to study the effects of policies that would raise the federal minimum wage. Users can also build their own policy options to see how different ways to increasing the minimum wage would influence earnings, employment, family income, and poverty.
What is the counter-argument to the minimum wage?
Opponents claim that raising the minimum wage would likely result in higher wages and salaries across the board, significantly increasing operating expenditures for businesses, who would subsequently raise product and service prices to compensate their increased labor costs.
How is the minimum wage adjusted?
If the minimum wage had been indexed to the median wage in 1998 or 1968, the minimum wage in 2014 would have been significantly different. The $10.21 minimum wage that would have come from a 1968 increase would have been over 24% more than the $8.26 that would have resulted from a 1998 increase. This emphasizes the necessity of determining the proper minimum wage level before indexing it to the median salary. If the minimum wage is established at a low proportion of the median salary and then indexed, it will only benefit a small portion of the workforce. Wage indexing merely preserves the minimum wage’s position in relation to the usual wage; it does not assist in determining the minimum wage’s initial level.
Wage indexing keeps the minimum wage from falling to levels that many consider unreasonably low or out of sync with broader wage growth in the labor market by connecting it to the median wage. Furthermore, economists and political scientists agree that economic fairnessspecifically, the relationship between the minimum wage and the overall distribution of wages in the United States economyis a key driver of what the American public considers to be proper minimum wage policy.
There are precedents for wage indexing the minimum wage
Economists are familiar with using the median wage as an index since they frequently compare the minimum wage to the median wage to determine the minimum wage’s robustness. The location of the minimum wage in the overall wage distribution across the economy is crucial in modern economic theory. Comparisons of the minimum and median wage are used in academic research on so-called wage-spillover effects. Economists compare national minimum-to-median pay ratios when evaluating the strength of minimum-wage regimes across nations and time periods.
Keeping the minimum wage from falling below the average salary has also been done in the past. Congress incorporated measures to index the minimum wage to 50% of the average pay in the late 1980s and early 1990s as part of the push to raise minimum wages. In the United Kingdom, the Low Pay Commission is an independent agency that advises the government on the appropriate yearly minimum wage rise by taking into account the gap between the minimum pay and the median wage.
The median wage is the best wage to use as an index
Instead than using the average wage to index the minimum wage to the general wage level, authorities should use the median hourly wage. Because it is unaffected by the minimum wage, the median wage is a good indicator. In the United States today, minimum wages cover fewer than 10 percent of the workforce. When the minimum wage is raised, it raises the wages of these low-income workers directly. It also indirectly raises the earnings of many workers who make more than minimum wage but are still in the lowest quarter of the pay distribution, leaving the center and median of the income distribution unaltered.
This method is preferable to utilizing the average wage, or mean wage, as the index’s peg. If the minimum wage is linked to the mean wage, then when minimum-wage workers get a raise, the average wage rises as well, raising minimum wages and so on. As a result of this dynamic, the percentage of the workforce earning the minimum wage rises over time, forcing companies to pay ever-increasing labor costs.
If the minimum wage is raised in line with the median wage, the proportion of the workforce earning the minimum wage will remain relatively stable over time. Because the median wage moves independently of the minimum wage, this is the case. The advantage of maintaining the minimum wage constant as a percentage of overall salaries is that workers vying for low-paid employment will discover that demand for their labor will remain constant among employers.
In practice, potential feedback effects from indexing to the average pay are tiny in a single year, but they can add up to economically significant amounts over time. Initiatives to correlate the minimum wage to the Consumer Price Index would have similar feedback consequences. If firms pass on minimum wage rises to their customers in the form of pricing increases, the minimum wage will have an indirect impact on inflation. The inflationary feedback effects of indexing the minimum wage to the average wage, on the other hand, would be substantially smaller because labor expenditures are only a small part of the total costs of producing products and services.
Another advantage of this technique of raising the minimum wage on an annual basis is the lack of any feedback effects from indexing the minimum wage to the median wage. Policymakers in Congress should seriously explore such legislation right now in order to begin implementing this new method of boosting the minimum wage in 2020.
Is the minimum wage in California adjusted for inflation?
The following Frequently Asked Questions (FAQs) are intended to answer specific questions about SB3 (Leno, Chapter 4, Statutes of 2016) and how the minimal wagering phase-in will work. The Labor Commissioner’s Minimum Wage Frequently Asked Inquiries page has more information on general questions about the Minimum Wage.
What is the timeline for SB3 (Leno, Chapter 4, Statutes of 2016)’s new state minimum wage increases? How will I know what the minimum wage rate is at my place of business?
If specific economic or fiscal conditions are met after the initial rise on January 1, 2017, the Governor can postpone a later scheduled increase for a year.
(These breaks are known as “off-ramps.”)
The following are the conditions for halting a scheduledincrease:
- If seasonally adjusted statewide job growth over the previous three or six months is negative, and retail sales receipts for the previous 12 months are negative, the Governor can suspend an increase.
- Alternatively, if an increase is expected to result in a deficit (defined as a negative operating reserve of more than 1% of yearly revenues) in the current state budget or the budget predicted for either of the next two fiscal years, the Governor can put it on hold.
- The Governor will make a preliminary assessment on whether the conditions for stopping the following year’s increase are met on August 1 of each year.
- By September 1, a final decision must be made.
When the California minimum wage reaches $15 an hour, how will future hikes be determined?
The state minimum wage will be adjusted annually for inflation based on the national consumer price index for urban wage earners and clerical workers after it reaches $15 an hour for all employees (CPI-W).
The minimum wage, however, cannot be reduced, even if the CPI is negative, and the maximum annual raise is 3.5 percent. Furthermore, the Governor will no longer be allowed to postpone a scheduled rise, and the initial adjusted increases may be hastened if the adjusted CPI-Wexceeds 7% in the first year.
For the purposes of deciding which minimum wage rate applies, who is regarded an employer and who is considered an employee?
“Any person who, directly or indirectly, or via an agent or any other person, employs or exercises control over the salaries, hours, or working conditions of any person,” according to Labor Code section 1182.12, includes the state, political subdivisions of the state, and municipalities.
Salaried executives, part-time workers, minors, and new hires would all be considered and counted as employees if they performed any kind of compensable work for the employer who is not a bona fideindependent contractor.
The law is silent on how employers should count employees to determine which wage rate applies.
Those with a workforce that hovers around 25 or swings above or below the threshold throughout the year, including employers who use seasonal or intermittent workers, will be affected by the question of how many employees they have.
In these cases, a court or the Labor Commissioner would likely focus on the facts surrounding an alleged underpayment within a pay period. They would examine whether every employee of that employer was counted (even those exempt from overtime as an executive, administrative, or professional), regardless of the number of hours worked or geographic location, because this law lays no restrictions on who is counted.
Courts will ultimately decide whether a counting technique is appropriate in light of the law’s goals, and the minimum wage law has long been seen as a fundamental protection for workers.
As a result, an employer must make a reasonable and good faith determination of the size of their workforce, recognizing that (1) when there is an ambiguity in the law or facts, the courts will generally look for a reasonable interpretation that is most favorable to workers; and (2) an erroneous decision to pay the lower wage rate could be far more costly in terms of additional penalties and interest than paying the higher rate in the first place.
If a business meets the threshold of 26 employees at any point during a pay period, the Labor Commissioner recommends that they reward their workers at the minimum higher wage rate for the duration of the pay period and continuing forward as long as they have a minimum of 26 employees.
Employers will be most protected from liability for unpaid wages, as well as related fines and penalties, if they use this strategy.
In instances involving a franchise, joint employment, or multiple employers, how are employees counted?
An employer that manages a franchise or has a joint or multi-employer relationship must examine the structure of their employment and franchise agreements to see if the franchisor or other contractual companies could be considered employers under the Labor Code.
As previously stated, a person or entity that has influence over an individual’s wages, hours, or working conditions may be deemed to be that individual’s employer.
For the purposes of computing the applicable minimum wage rate, all individuals under that employer’s control would need to be aggregated and counted as employees.
In scenarios involving a group of corporations or a business with a parent company and a subsidiary, how are employees counted?
The law specifically states: “Employees who are treated as employees of a single qualified taxpayer under subdivision (h) of Section 23626 of the Revenue and Taxation Code, as it stood on, must be treated as employees of that taxpayer for the purposes of this.”
This provision applies to businesses as described in California Revenue and Tax Code section 23626, subsection (h).
Employers should combine the total number of employees from all relevant corporate units.
Employers that have additional questions or concerns about whether this provision applies to their company should speak with an attorney or a tax specialist.
The minimum wage regulation applies to employees of a staffing agency or labor contractor.
When a person is hired through a staffing agency or a labor contractor, the law does not prescribe how to count them as workers.
If a staffing agency or laborcontractor has more than 25 employees during a pay period, including workers who are dispatched to several job sites, the higher minimum wage should be applied to each of those employees.
For the purposes of determining the applicable minimum wage rate, an employer who hires workers through a staffing agency, labor contractor, or other arrangement shall aggregate and count such workers as employees, along with other directhire workers.
Throughout the year, an employer may have less than 26 employees at times and more than 26 employees at other times. At any point during a pay period, a business with 26 or more employees should apply the large-employer minimum wage to all employees for that pay period.
Employers are required by the Labor Code and employment contract legislation to tell employees of the terms of their compensation in advance (please see next question for further detail on noticerequirements).
If an employer’s workforce falls below 26, the minimum wage rate does not have to be automatically reduced.
However, if an employer wishes to cut the wage rate because their workforce falls below the 26-employee threshold, the affected employees must be notified in advance of the wage reduction.
If new hires or returning workers brought the workforce back up to 26 or more employees, the employer would have to boost the wage rate.
How do companies notify employees of a rate difference between two relevant rates due to a change in the number of employees?
As required by Labor Code 2810.5, if an employer changes an employee’s rate of pay, the business must notify workers in advance and provide notice to all affected employees in writing or on the employee’s pay stub (for more information seeLabor Code 2810.5 and our Frequently AskedQuestions).
Employers will not be penalized if they pay a wage rate that is higher than the legal minimum.
If they pay a wage rate that is less than the legal minimum, they may be responsible for back payments and fines.
Employers can reduce confusion and potential liability by giving proper written notice of such changes and keeping reliable records of them. If a business falls below the 26-employee threshold in the midst of a pay period and decides to pay the lower minimum wage rate, it is not proper to reduce their employees’ pay until the next pay period, and only after giving their employees the needed notice.
What if employees work in a city or county where the minimum wage is set locally?
Local governments (cities and counties) have the authority to set minimum wage rates for workers in their jurisdiction.
Several local governments have adopted it “Local rules may have different thresholds for employer size (number of employees) and requirements for establishing the applicable rate, resulting in “layered” minimum wage standards based on a specific number of employees.
When several federal, state, and local minimum wage rates apply to the same person or place, the employer is required to pay the highest of those rates at any given moment.
That will be California’s minimum wage rate in most sections of the state (as of 1/1/17), but it will be a higher municipal minimum wage rate in some cities.
The UC Berkeley LaborCenter maintains a comprehensive list of local minimum wage ordinances across the country.
The Department of Industrial Relations does not monitor or verify this list, but it is provided for the public’s convenience: Minimum Wage Ordinances in US Cities and Counties (UCBerkeley Labor Center)