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.
To keep up with inflation, how much need wages rise?
Work has gotten worse for many since the outbreak of the epidemic, further aggravating the issue. Due to the high incidence of employees abandoning their jobs, a smaller number of people are shouldering the workload that was formerly carried by a larger number of workers, adding to significant burnout rates. Not to mention the additional hazards posed by the pandemic itself, which include creating more hazardous work situations and adding more labor such as ensuring consumers are wearing masks.
“No one thinks when they sign up to be a cashier that that job will be deadly,” Molly Kinder, a Brookings fellow and the report’s author, told Recode, referring to the dangers that people working in front-line positions at places like grocery stores or pharmacies face if they become infected with the virus. According to Kinder, one Kroger employee she’s been interviewing isn’t sure if a raise will be enough to compensate for the increased stress.
“She’s been harping on the importance of a $15 minimum wage. “Is that additional tiny bit of money worth it when my mental health is suffering, it’s so unsafe, and I’m spending more at the pump?” she asks when she finally understands.
Inflationary pressures on salaries are projected to endure through 2022. According to a new poll of more than 5,000 employers across industries by compensation software business Payscale, 85 percent of employers are concerned that projected salary increases this year, which are already significantly greater than in recent years, will be undermined by inflation.
Fortunately for you, we’re in a once-in-a-generation historical moment where inflation is predicted to decline but labor shortages are not.
“According to David Smith, an economics professor at Pepperdine’s business school, “workers have more bargaining power, which can be a countervailing force to some of the difficulties we’re having,” such as income disparity. “In the long run, that would be beneficial.”
For the time being, those gains are required to keep up with the rising cost of commodities. However, if the price of products moderates, these long-overdue pay increases may have some real-world impact for Americans.
What employers are going to have to do about it
Employers suffer from inflation because they must spend more to keep their employees from looking for greater pay elsewhere. Employers may need to raise wages in line with inflation, provide better perks, or change how they operate in order to retain those workers.
The most basic solution is to raise salaries. In the six years that Payscale has been collecting this data, 44 percent of firms say they plan to provide average raises of 3% or more this year. Fewer than 10% are increasing pay by more than 5%, which is more in line with inflation.
“There are certain companies who simply go out there and say, ‘We have enough wealth, and we can go out and be dominant in salary as a differentiator,'” says one employer. Payscale’s chief people officer, Shelly Holt, stated. “When you look at a middle or smaller company, they might not have the luxury.”
To recruit and keep employees, these businesses will have to rely more heavily on other forms of benefits. This might entail, among other things, greater health care coverage, increased vacation time, and remote job choices. That corresponds to some of the insights gained during the Great Resignation.
“Employees want more than just a good salary. Pay is important, but employees also desire workplace flexibility and the opportunity to live better lives, which is changing how they think about perks and total rewards, according to Holt.
Companies are offering a greater choice of perks this year than they were pre-pandemic, according to Payscale. Prior to the pandemic, only 40% of the organizations polled offered remote work choices; now, 65% do. This year, the number of companies offering mental health and wellness programs increased by 7% to 65 percent. There were also modest increases in the number of businesses that provide four-day workweeks and child care subsidies.
According to Allie Kelly, chief marketing officer of recruiting platform Jobvite, the things that might help set firms apart require a shift in perspective, from treating employees like labor to treating them like people. This necessitates a constant reevaluation of offers in order to keep up with what’s vital to their employees.
“People have various perceptions and understandings of their own self-worth and what matters to them in life. Money is important, but it isn’t enough,” Kelly said, listing perks such as child care, shorter workdays, and more professional growth, as well as lower benefits and income.
While many of these perks may be less expensive than a 7.9% annual raise, they are not free. Companies must decide whether they can or should pass on those expenses to customers, which could worsen inflation, or whether they can simply swallow them as a cost of doing business. According to Erica Groshen, senior economics advisor at Cornell University’s labor school, this could entail opening for fewer hours, producing less overall, or cutting profit margins.
“Right now, and for a long time, we have historically high profit margins,” Groshen remarked. “As a result, it would not be considered a crisis in the past.”
The rising expense of human work is also hastening the transition from wage labor to automation, as has been predicted for some time. Robots, while expensive, do not demand more money and do not become ill during a pandemic.
Employers will replace people with robots to the extent that they can, according to Shivaram Rajgopal, a professor at Columbia University’s business school.
“Now you use a QR code to find the menu,” Rajgopal explained. “The next step is to simply place the order, and it will be delivered to the kitchen. We don’t require as many people to serve us.”
However, for those of us who haven’t yet been replaced by robots, the current employment scenario may work in our favor. That’s because, while inflation is expected to reduce, the demographics that are causing the labor shortage an entire generation of baby boomers retiring aren’t likely to change.
“I don’t think the power will suddenly shift back to employers,” said Kinder of the Brookings Institution. “If inflation moderates, some of these demand-and-supply difficulties moderate, and workers retain some negotiating leverage, that would be a good conclusion.”
To put it another way, your next increase may feel a lot better if you’re not spending as much for everything else, but we don’t know when high inflation will end.
This item has been updated with new inflation and wage data from the Bureau of Labor Statistics as of March 10, 2022.
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.
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.)
Does inflation affect wages?
Despite rising salaries, inflation resulted in a 2.4 percent pay loss for the ordinary worker last year. According to the US Department of Labor, inflation increased by 7% in December from the previous year. Wages climbed by 4.7 percent on average per hour. On average, this translates to a wage decrease of more than 2%.
How do you account for wage increases due to inflation?
The steps for calculating an inflation-adjusted pay increase are as follows.
- Step 1: Use the Consumer Price Index to calculate the 12-month rate of inflation (CPI).
- Step 2: Divide the percentage by 100 to convert it to a decimal (2 percent = 2 100 = 0.02).
Is everyone getting a raise in 2022 when the minimum wage rises?
An economy that works for everyone is necessary for progress and the well-being of working families.
President Biden signed the Minimum Wage Executive Order on April 27, 2021, and the Department of Labor’s Wage and Hour Division issued the implementing regulations, ensuring that workers on federal contracts are paid a fair wage and demonstrating that the government can lead by example.
We’re boosting the minimum pay for government contract workers to $15.00 per hour beginning January 30, 2022. This rise, which will effect more than 300,000 workers, comes at a time when the federal government is making historic investments in our nation’s infrastructure, which will result in the creation of millions of new jobs in construction and associated industries.
While construction employees will be covered by the $15 minimum wage, workers in child care, health care, and building and other services on government contracts will also be covered. Women make up around 54% of those affected by the minimum wage rise, while workers of color make up roughly 25%. Workers who benefit from our final minimum wage rule will receive an average annual rise of $5,228.
Raising the minimum wage strengthens families’ financial security, decreases poverty, and moves the country closer to reversing decades of income inequality. Better government services, increased morale and productivity, and fewer turnover and absenteeism are all possible additional benefits.
The rule also protects workers on government contracts, in addition to raising the minimum wage:
- Raising the minimum pay for disabled workers who would otherwise earn less than the minimum wage.
- Starting Jan. 1, 2023, federal contract workers who get tips will be paid at least 85 percent of the entire minimum wage in cash, and 100 percent starting Jan. 1, 2024.
- Workers who provide recreational activities on public lands should have their minimum wage rights restored.
As of January 30, 2021, these modifications will apply to most new contracts, including renewals and extensions. They apply to federal contract workers in all 50 states, as well as the District of Columbia, Puerto Rico, the Virgin Islands, Outer Continental Shelf lands as defined in the Outer Continental Shelf Lands Act, American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Wake Island, and Johnston Island, as well as the District of Columbia.
As a government employee, I witness firsthand how the labor of federal contract workers keeps the government functioning and ensures that the American people have access to critical services and resources. Executive Order 14026, which I am happy to sign, will help hundreds of thousands of hardworking people, their families, and our communities.
Would you like to understand more about this rule and what it implications for businesses? On the 26th and 27th of January, register for one of our federal contractor seminars.
Is the United Kingdom’s minimum wage linked to inflation?
Since their inception in the United Kingdom, the national minimum and living wages have risen every year. However, this does not imply that they have kept up with rising living costs.
Chancellor Rishi Sunak announced an increase in the national living and minimum wages in his Autumn Budget, declaring that the higher rates “guarantee we’re making work pay and maintains us on track to reach our commitment to abolish low pay by the end of this Parliament.”
Every country in the globe has its own system for determining the minimum wage, as well as the amounts that should be paid to different age groups.
Some countries have a minimum pay per hour, whereas others have a minimum wage per working day, week, or month. Many countries still do not have any kind of minimum wage at all.
In general, the national minimum wage in this country rises by roughly 4% per year, in accordance with inflation rates. If the minimum wage does not keep pace with inflation, people will grow poorer despite earning the same amount of money.
Naturally, different countries have varying living costs, inflation rates, and average wages. But, in the broader scheme of things, how does the United Kingdom fare? And who has the world’s highest minimum wage?
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 increasing the minimum wage a bad idea?
- The Biden administration wants to increase the federal minimum wage from $7.25 to $15 per hour.
- While a $15 minimum wage may benefit some employed employees, the existing data on the supply and demand side of the labor market suggests that it will price others out of the market and exacerbate the problems faced by many small firms.
- On the supply side of the labor market, Black and Hispanic workers, as well as those with lower educational attainment, are most at risk of remaining unemployed; these groups make up a significant proportion of minimum wage earners and are heavily represented in industries that have been negatively affected by the COVID-19 pandemic.
- Small businesses have been severely harmed by the pandemic on the demand side; at its worst, 41 percent of small enterprises in low-income areas closed, with a 46 percent reduction in sales since January 2020.
As part of its COVID-19 economic assistance package, the Biden administration proposes raising the federal minimum wage from $7.25 to $15 per hour. Some argue that by using the budget reconciliation procedure, Congress might raise the minimum wage with a simple majority vote in the Senate. An rise in the minimum wage, especially one as large as the one suggested, would benefit some workers while excluding others from the labor market. According to labor supply data, there are millions of unemployed employees who are low-skilled and have a low level of education. Because of the $15 minimum wage, many employees are likely to remain unemployed. On the demand side, many businesses are facing declining net revenues and, in some cases, closure; this is especially true of small enterprises already hurt by the COVID-19 crisis, which employ a disproportionate number of those individuals. A $15 minimum wage would not only stifle recovery, but it would also harm many of the employees it is supposed to aid.
The pandemic has had an impact on practically every aspect of the economy, but some industries and people have been hit particularly hard. Knowing which industries and types of workers are the most affected by the present economic environment might help determine where a significant rise in the minimum wage will cause the most harm and potentially result in more people losing their jobs.
While the Biden Administration has stated that it is committed to helping low-income individuals and families, particularly those from Black and Hispanic communities, a federally enforced minimum wage of $15 will disproportionately harm these employees. The pandemic’s destructive impact on communities of color has been extensively studied. For example, black and Latino workers make up about a quarter of the service industry workforce yet are underrepresented in management roles. Black and Hispanic workers make up 13 and 24 percent of the workforce in the leisure and hospitality business, respectively.
** Estimates for the racial groupings listed above
Because data for all races is not supplied, the terms white, black, and African American do not add up to totals. People of any race who identify as Hispanic or Latino might be Hispanic or Latino. I
Although the employment situation for Black and Hispanic employees has improved since the peak of unemployment, these groups remain disproportionately represented among the unemployed. A significant increase in the federal minimum wage could push those who are already unemployed out of the labor market, potentially resulting in more layoffs or job losses.
Those with a lower educational level are another group of workers that are particularly vulnerable. According to data from the Bureau of Labor Statistics (BLS), employees who did not complete high school were disproportionately affected by the pandemic, with unemployment soaring to 21% and remaining roughly double that of 2019. Workers with a bachelor’s degree or more, on the other hand, are seeing their jobless rates rebound to 2019 levels. Workers with lower educational attainment are more likely to work at or below the minimum wage, which is unsurprising. Because up-skilling and reskilling programs are not widely available in the United States, and higher education is sometimes prohibitively expensive, workers with low educational attainment and low skills will most likely feel the effects of increasing minimum wage.
Even as the economy begins to recover, the COVID-19 pandemic has forced many firms, particularly small businesses, to close permanently or function on razor-thin margins. Many of these enterprises are already operating in a difficult climate, having had to absorb expenditures connected with increased safety precautions and state-mandated company closures while losing revenue due to decreased activity.
The expense of a $15 minimum wage might drive the most vulnerable businesses to stop hiring, reduce employee hours, eliminate positions, or close entirely.
When COVID-19 initially began to have an impact on businesses, layoffs were concentrated in industries that required in-person assistance. The leisure and hospitality business, for example, saw 40% unemployment at its height and had the highest proportion of low-wage workers, according to 2019 BLS statistics. Mining, construction, transportation, and food services are among the other businesses that have been severely impacted by the pandemic. While there has been progress, unemployment in these industries remains high.
Given the high concentrations of low-paid workers in these industries, many of whom are now unemployed, raising the minimum wage to $15 would create additional barriers to speedy reopening and rehiring, resulting in long-term unemployment for the least educated and skilled individuals.
Due to a lack of revenue and required closures, the pandemic prompted many small businesses to close temporarily; it also forced numerous enterprises to close permanently. The highest percent change in the number of open small enterprises occurred in April 2020, with a 44 percent decrease from January 2020.
The changes in the leisure and hospitality industry, which showed an almost 50% fall in open small enterprises in April 2020 compared to January 2020, are particularly noteworthy. This industry employs the vast majority of people who would be directly impacted by minimum wage hikes, many of whom are likely currently unemployed.
As previously said, closures due to reduced business and mandates resulted in income loss; while many larger businesses were able to withstand the loss, many small enterprises were forced to close permanently or resort to layoffs as a cost-cutting solution. While the Paycheck Protection Program loans, which were established as part of the Coronavirus Aid, Relief, and Economic Security Act, brought temporary relief to many, businesses are still struggling.
Despite an increase in revenues from April to December, the status of the leisure and hospitality business remains fragile, particularly as the number of cases continues to rise.
Given that the typical non-supervisory wage in the leisure and hospitality industry is less than the proposed $15 minimum wage, these businesses would have to manage the impact of increased costs, which would reduce net revenue even further. Many small firms would be forced to raise prices, limiting demand for goods and services, or reduce hiring, cut worker hours, or eliminate positions if the minimum wage was raised.
An rise in the federal minimum wage will worsen the economic loss already experienced by many firms and their employees. While those who are able to keep their jobs will undoubtedly profit from the raise, many others will suffer further consequences. The enormous number of unemployed people who previously worked as low-wage workers in businesses that have been hit the hardest by the pandemic are particularly vulnerable. It’s unclear whether those personnel will be required to return during this period. As firms balance reduced revenues and increasing expenditures, adding a federally required cost in the form of an increased minimum wage would result in extended unemployment, reduced work hours or hiring, and increased layoffs for low-paid workers.
https://www.bls.gov/news.release/empsit.t04.htm; https://www.bls.gov/opub/reports/minimum-wage/2019/home.htm#cps mw whe char.f.1; https://www.bls.gov/opub/reports/minimum-wage/2019/home.htm#cps mw whe_