In the world of volunteerism, a well known adage instructs that, “If you want to get something done, ask a busy person.” It would seem that the leaders of The Church of Jesus Christ of Latter-day Saints employed this maxim when they asked me to serve as a bishop back in the early 1990s.
At the time, I ran a demanding business which required me to split my time between Chicago, London, Paris, and Geneva. At home I had four children ranging in age from kindergarten to junior high. Add to this the numerous volunteer activities and one could accurately describe me as a busy person.
After accepting this assignment (yet another stress-filled position) I became aware that, as a bishop, I would be required to counsel people with spiritual challenges. I knew little of counseling. Fortunately, a professional psychologist friend suggested a textbook entitled, “Becoming Solution-Focussed in Brief Therapy.” This is a terrific book (still in print after all of these years).
One of the chief tenets of solution-focussed brief therapy assures that while causes of problems may be quite complex, solutions can often be simple and straightforward. Hence, a perfect understanding of a problem’s origins and evolution is not necessarily required for the construction of a solution. Remedies can be fabricated by observing activity and behaviors when the problem is absent, i.e., at “times of exception.”
Perhaps solution-focused therapy can offer an approach to some of our economic challenges. To cite one such problem, we have observed our economy has been growing steadily for many, many decades. Yet the medium family income has actually trended lower since the late 1990s.
The benefits of growth have been channeled to a small portion of our citizens, leaving the rest with reduced pay. In short, income inequality has become a significant challenge.
A solution-focused therapist would construct a remedy by examining times when income was more equal, and determine what was happening then. Next the therapist would suggest doing more of the things that were occurring at the time.
Since income inequality has been on the rise since about 1970, we need to go back to the 1960s to explore our economy and discover the contrasts.
One policy difference comes immediately into view, namely, the minimum wage. This happens to be one of President Obama’s initiatives to strengthen the middle class. How does the minimum wage of 2015 compare to that of the 1960s?
Prior to answering that question, it might be worthwhile to observe that Brazil, in 2011, approved a law that requires the minimum wage to be indexed to economic growth as well as to inflation. That is a very progressive policy.
Inflation, of course, erodes the spending power of those on a fixed wage. Thus the minimum wage in Brazil is increased by the rate of inflation, but the Brazilians do not stop there. In addition, as productivity increases, the economy grows. Brazilians feel that everyone should participate in the nation’s added prosperity arising from economic expansion. So they have chosen to index the minimum wage to growth as well.
Back in 1968, the minimum wage in the US was $1.60. If we were to index it to both inflation and growth, today’s minimum wage would be around $22 (give or take a bit depending upon the measures of growth and inflation one chooses). Would a minimum wage such as the one we had in 1968 help solve our income inequality today? There can be little doubt, but what fallout would follow?
Opponents of raising the minimum wage vocalize several concerns. First up, raising the minimum wage will increase inflation. The argument is made that when the minimum wage rises, corporations will have to charge more for their goods since they have to pay workers more. Inflation will follow.
The logic is sound in theory but the reality is different. Inflation is a monetary phenomenon in the hands of the Fed. The Fed can handle this.
Further, changing the minimum wage is about reordering the relative wages of the top and the bottom income recipients. Inflation does not arise from a shift in the relative wages of workers and management.
Additionally, and related, studies indicate that, due to the low wages of those who are affected by the minimum wage, the sensitivity of overall prices relative to the minimum wage is very, very low, on the order of 0.04. This means that if the minimum wage were to be raised by a full 100 percent, prices would likely move up by a one time jump of a mere four percent.
Opponents also argue that should the minimum wage increase, we would become uncompetitive in the world economy. As workers’ pay is increased, our cost of traded goods would increase, leaving us unable to compete with our foreign trading partners who have lower labor costs.
The U.S. currently competes well in the world economy. While cost is always an issue, we can produce many goods and services quite competitively. Increasing the minimum wage need not change our external pricing structure. Raising low income wages while lowering high income remuneration can leave total costs unchanged. Competition in the face of a high minimum wage will do just that.
Finally, opponents of the minimum wage raise the warning voice of unemployment and additional outsourcing should we “tinker with nature” so to speak. Once again, reality is at odds with this concern. A very large portion of low income workers in our economy perform services which must be performed locally. We cannot hire a person in the Philippines to check us out at Hannaford, cut our hair, act as custodians and cleaners, nor prepare and serve our meals out.
The best empirical evidence we have regarding the minimum wage refutes the idea of significant unemployment as a fallout. There appears to be significant monopsony power in the labor market. In other words, employers have more power over wages than do workers. As such, raising the wages at the bottom does not affect the rate of unemployment in a significant way. It merely transfers income from the top downward.
Put another way, raising the minimum wage reverses the trend in relative wages which has been underway since 1970.
One actual fallout of a large increase in the minimum wage concerns earned income credit in the tax system. As the wages of the poor are increased, fewer people qualify for tax credits and other income supplements. I would guess that given a choice, most people would prefer to have higher wages and lower tax credits and SNAP. Qualifying for such programs sends a different message than does a relatively higher wage.
Just as certain mental health problems do actually require knowledge of their origins and evolutions, some economic ailments necessitate intelligence regarding their anatomy. Next week we will examine some of the forces which have contributed to our shrinking middle class.
(Marcus Hutchins, MA, M. Phil, Economics, Columbia University, NYC, is a former economist, treasury bond arbitrage trader and hedge fund manager. He retired to Southport in 1997 where he resides with his wife Andrea and his youngest daughter Abbey. He welcomes feedback at coastaleconomist@me.com.)
