FYI – Minimum Wage Increase

24 03 2008

They’re talking about increasing the minimum wage to $7.25 in two years. That’s an increase of over 40%. While nobody doubts that the minimum wage should be a fair wage and at the very least keep up with inflation, we need to remember that it also drives inflation. A 40% increase in the minimum wage would also mean an similar increase in prices. As an example, if your paying $1.29 for a loaf of bread now, that price would go up to approximately $1.82. As prices increase to match wage increases, minimum wage earners, as they always have, find themselves financially no better off (just paying more in taxes). However, people with fixed incomes, such as pensioners, find themselves shortchanged as cost of living increases, where available, seldom keep pace with true inflation. Also, employment levels are negatively impacted while the economy equalizes itself between higher labor costs as less demand due to higher prices. Negatively effected, too, are those that sell in export markets. Foreign made goods would, however, be less expensive. In the end, the poor will stay just as poor as they were before. And those depending on that monthly check all that much poorer (as a 40% increase there will be highly unlikely).

Projected costs @ 40% increase: $2.99 orange juice – $4.19, $19.99 shirt – $27.9    $49.99 toaster oven – $69.99,  $100.00 bag of groceries – $140.00,  $500.00 TV- $700. 1999.00 fridge – $2,798.60, $22,500.00 car – $31,500.00, $165,000. house – $231,000.  2.65 million dollar Ferrari – $3,710,000.00,   a  25 million dollar Hollywood mansion now becomes 35 million. (But remember, if you can afford it now you should be able to afford it then because your wages will go up too. Only the numbers change.)

Perhaps the fairest way to raise the minimum wage would be to automatically tie it to increases in the actual cost of living. Say the wage is $5.15 (as it is), and last years inflation rate was 6%. Then the rate should go up to $5.46. An since wage increases drive inflation as a correction you would have to discount that 6% from any increase to the cost of living the next year. So if inflation the next year was 10% you take away the 6% from it and increase the wage to $5.68 per hour (true cost of living increase). If the cost of living doesn’t go up, are for some reason were to fall, the wage would stay the same. Raising the wage in this way would avoid the shock to the economy that the increases have caused  in the past. It wouldn’t so negatively effect the elderly, fixed income groups either. Extraordinary short term spikes to the economy (such as during wartime, or a embargo such as happened during the nineteen seventies) could be held in check by limited freezes to the automatic increases. And, too, we wouldn’t have to revisit this issue each and every election time.

See, really, costs are based on the X factor. If a company wants to make a profit of X, then whatever the costs are, prices or employees will be adjusted to the level that will allow the company to make X. For the most part supply and demand are factors used in figuring production levels, not prices.

Al

(reprint)

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