SHOULD THE MINIMUM WAGE BE INCREASED?  

 

In late March 2021 former US Treasury Secretary Lawrence Summers, PhD, raised a few eyebrows when he warned that significant inflation may ensue when the U.S. economy emerged from the covid-19 pandemic. 

 

This was curious to me because as an economist I wondered how an economy recovering from 14% to 15% unemployment could have a worrisome rate of inflation. In fact, the last time unemployment was that high and higher was during the Great Depression and it is the only time in history that the U.S. economy actually suffered from deflation, not inflation. 

 

Eventually, I had the opportunity to talk to Larry and quizzed him regarding his concerns. He stated there were a number of inflationary pressures he saw could materialize. One of those concerns was the proposal that the minimum wage be more than doubled from $7.25 per hour to $15.00 per hour. 

 

One does not have to be an economist like Larry and I to understand that if a key component of the economy such as wages is doubled serious inflation will result. It is just common sense. 

 

That said, the minimum wage since its creation in the United States in 1938 has become a stabilizing force within the economy and can make the difference between Americans having a tolerable, minimum standard of living or experiencing abject poverty. This country is better than that. 

 

Question is: what is a fair level for the minimum wage which will provide the rock bottom amount of financial support for American labor without unduly harming the economy and possibly contributing to the size of the unemployment lines. 

To answer this question, the author constructed the table below: 

 

TABLE 1. MINIMUM WAGE INCREASES OVER SEVEN DECADES (1938-2009) 

Minimum wage       Effective Date           % Increase        Value in 1938 Dollars 

$0.25                     October 24, 1938                -                                - 

$0.30                     October 24, 1939            20.00%                    $0.30  

$0.40                     October 24, 1945            33.33%                    $0.32 

$0.75                     January 25, 1950            87.50%                    $0.43 

$1.00                     March 1, 1956                 33.33%                    $0.48 

$1.15                     September 3, 1961         15.00%                    $0.53 

$1.25                     September 3, 1963           8.70%                    $0.54 

$1.40                     February 1, 1967            12.00%                    $0.59 

$1.60                     February 1, 1968            14.29%                    $0.62 

$2.00                     May 1, 1974                    25.00%                    $0.87 

$2.10                     January 1, 1975                5.00%                    $0.95 

$2.30                     January 1, 1976                9.52%                    $1.01 

$2.65                     January 1, 1978              15.22%                    $1.16 

$2.90                     January 1, 1979                9.43%                    $1.29 

$3.10                     January 1, 1980                6.90%                    $1.46 

$3.35                     January 1, 1981                8.06%                    $1.61 

$3.80                     April 1, 1990                   13.43%                    $2.32 

$4.25                     April 1, 1991                   11.84%                    $2.41 

$4.75                     October 1, 1996              11.76%                    $2.78 

$5.15                     September 1, 1997           8.42%                    $2.85  

$5.85                     July 24, 2007                  13.59%                    $3.68 

$6.55                     July 24, 2008                  11.97%                    $3.82 

$7.25                     July 24, 2009                  10.69%                    $3.80 

 

The last time the minimum wage was raised was in 2009. The quarter in 1938 increased in value by $3.55 or to $3.80 overall. In essence, a nickel per hour or $100 per year was added to the full-time wage earner’s financial net worth each of those 71 years. That is very unlikely to cause the economy to overheat and cause inflation. 

 

The overall percentage increase in the nearly 71 years between October 1938 and July 2009 is 19.4% per year, indicating the minimum wage should be adjusted to $9.77 per hour as it should stand in May 2022.  

 

The past 13 years is the longest period without an increase in the minimum wage in history. The wage earner making the current minimum wage has fallen behind by 34.7% the past 154 months with inflation eating away at their purchasing power at a stunning 8.3% annual rate. Something must be done.  

 

According to TABLE 1, the last three increases in the minimum wage was $0.70 per hour in 2007, 2008 and 2009. If similar increases were made in 2023, 2024 2025 and 2026, $2.80 per hour would be added to the federal minimum wage and would become $10.05 per hour. This would be an increase of 38.7% in wages in four years. 

 

While this would not entirely make up for the losses the past 13 years, history shows the economy can absorb these kinds of increases without doing undue harm to it or to increase inflationary pressures any more than has already been experienced as a result of the covid-19 pandemic.   

 

The author further proposes that a cost-of-living-adjustment (COLA) be made automatically each year beginning in 2026 similar to the COLA for Social Security. This would guarantee an appropriate, noninflationary increase in the minimum wage for American workers and would not subject American wage-earners to another 13-year wait for a pay raise they so richly deserve. 

 

-Phil Sutton, DBA & PhD, SVC Founder & President/Chief Executive  

 SVC E-mail: svctrailblazers@svctrailblazerpublications.com                                                 SVC Public Website: svctrailblazerpublications.com