President Joe Biden’s pandemic relief plan includes direct cash payments, improved unemployment benefits, vaccine funding, and aid to state and local governments.
But Biden’s wish list contains an unexpected point: a minimum wage of $ 15.
Labor advocates have been calling for this for years, and it is no surprise that a democratic government would try now. After all, the coronavirus has spread in part because so many low-wage workers had to keep working in high-contact environments.
Raising the minimum wage will not fix this problem immediately, so Congress could oppose this part.
So far, however, there haven’t been many objections. Republicans seem more determined to stop state and local aid.
So a national minimum wage of $ 15 could indeed soon pass. In this case, the economic consequences could be important.
Photo: Wikimedia Commons
Minimum wage laws are a form of price control. They override market forces and tell employers, “You can only buy workers if you pay that much.” Likewise, minimum wage laws tell workers, “You can only sell your work if you ask that much.”
In much of the United States, current wages are already well above the legal minimum wage, which in some states and cities is $ 7.25 / hour at the federal level and above.
This patchwork created a kind of laboratory to measure the effect. In theory, unemployment should be higher in places with a higher minimum wage. Sometimes it is, but not always.
Filtering out other effects is difficult when companies can lower their labor costs by moving outside of city limits or across a state line. Customers can easily follow.
A nationwide federal minimum of $ 15 would clarify that – and have other implications as well.
Source: Wikimedia Commons
When Biden proposed the $ 15 minimum wage, he said, “Nobody who works 40 hours a week should live below the poverty line.”
This is a moral statement, not an economic one. But codifying morality into law is what governments do. We elect Congress and the President to strike the right balance.
There is evidence that most people agree with Biden on this – even the Republican base.
Florida just voted in November to gradually raise its minimum wage to $ 15 by 2026 … on the same ballot that Donald Trump received the Sunshine State’s electoral votes on. A national increase in the minimum wage thus appears politically feasible.
One result could be higher prices for labor-intensive goods and services. However, this assumes that productivity remains the same. It’s not allowed. Workers who don’t have to wonder if they can afford their next meal should be happier and more productive.
But there would be some effect, not just for the lowest level workers.
For example, suppose a company’s junior employees make $ 10 or $ 12 an hour, and the more experienced make $ 15. When the minimum wage rises to $ 15, those in the lower tier receive a raise.
Those already making $ 15 or more would also likely receive a raise to reflect their higher relative worth. Same goes for those above them and up the chain.
A higher minimum wage, depending on the details and how it is phased in, could bring wages up significantly. And this is where the macro effects get interesting.
Source: Wikimedia Commons
One of the mysteries of the last few years is why the so-called “Phillips curve” no longer works. This is an old economic theory that says that inflation and unemployment are inversely related. Instead, we saw low unemployment and low inflation until the pandemic broke out.
(You can argue, as I’ve done here and here, that inflation really wasn’t that low for most people. But put that aside for now.)
The seemingly low inflation encouraged the Federal Reserve to keep interest rates artificially low since 2008. Now they are even lower thanks to the monetary policy pandemic. Fed officials have repeatedly stated that they will not cut rates until they see significant, persistent inflation.
A higher minimum wage can create, or at least tighten, the conditions that force the Fed to cut rates. This would have a serious impact on asset prices, government funding costs, and the real estate market.
These effects aren’t necessarily bad. But they would be noticed.
Much depends on where the money is coming from. We will get inflation when higher wages drive prices up. But that is not inevitable. Competition could force companies to accept lower profit margins.
In this case, the bigger consequence could be distribution. Money that wealthy businessmen and shareholders would once have saved goes instead to low-wage workers who spend it.
You have heard of “income inequality”. Even many conservatives agree that making so much is a problem for a small number of wealthy investors, while many workers make so little.
Government policies that enforce higher wages carry income over from Capital to Job.
What that would look like is currently difficult to predict. But we could find out soon.
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