By Dr. Fred McKinney
It is time to confront the reality that we need to significantly increase the minimum wage far exceeding the rate being discussed in Washington, D.C., or in state capitols around the country. In 2013, Congress proposed (Senate bill 460) increasing the federal minimum wage from $7.25 per hour to $10.10 per hour (in three steps) by 2015. This change would be welcome, however, we need a minimum wage that is even higher and takes effect sooner. But I encourage Congress to pass Senate bill 460 and for President Obama to sign it immediately.
It is important to remember and acknowledge that Franklin Delano Roosevelt’s motivation to propose and enact the nation’s first minimum wage law was to increase the amount of income in the hands of millions of American workers. The minimum wage was passed during the height of the Great Depression. It was also enacted with widespread criticism from traditional economists who were quick to point out that economic theory was unequivocal to the negative impact of the minimum wage.
Economic theory states that labor markets are like other markets: Demand and supply determine prices and the price in labor markets is the wage. Equilibrium in a particular labor market occurs when the demand for workers equals the supply of those workers. Employers compare wages to the value of what workers produce. Worker demand increases if productivity value exceeds their wage. If wages were to increase without an increase in productivity value, demand declines, hence the negative relationship between wages and demand.
The supply of labor is based on the needs and aspirations of workers and households. Economists argue that leisure is a very valuable good, and that the cost of leisure is the wage. As the wage increases, leisure becomes more expensive, so like other goods and services, as the price of something increases consumers/workers demand less of it. This dynamic leads to a positive relationship between the wage and the amount of labor workers want to supply to the market.
This leads to the economic theory criticism of minimum wage increases. A minimum wage set above the equilibrium wage, or a wage above the productivity value, will result in more workers wanting to work at that higher wage and a reduction in the demand for workers at that higher wage. This gap between the demand for workers and the supply of workers is what we call unemployment.
That is the traditional economic view. It is logical, analytical and incomplete.
Traditional economic analysis fails to recognize the fact that low-wage workers impacted by an increase in the minimum wage live somewhere. They do not live in the highest income communities. They live where other low-wage workers reside. Unfortunately, because incomes in these communities are so low, residents often spend their money near where they work, not where they live. As a result, incomes in low-wage communities are not high enough to support business growth and economic sustainability.
The only way to end this vicious circle of poverty is to increase incomes through higher wages.
The low-wage economy keeps communities poor and people dependent, or forces them into the underground economy. One thing everyone agrees with is that we must find ways to encourage workers to increase their productivity that justifies the higher minimum wage.
Increasing the minimum wage would increase the buying power of the poorest Americans. Increasing the minimum wage would help create an environment in the communities where low-wage workers live that would improve the chances these communities will develop. If anything, we are not thinking big enough. President Roosevelt was wise enough to understand that the minimum wage is macroeconomic policy not microeconomics.
Fred McKinney is president and CEO of the Greater New England Minority Supplier Development Council in Hamden.