Inflation and The Amazing Pen

As Yogi Berra said: "It's déjà vu all over again", but this time it's with a "pen and a phone."

The President wants to raise the Federal Minimum Wage to $10.10 per hour indexed to inflation. Not to be confused with the President's increasing the Minimum Wage for all Federal Contractors to $10.10, this new foray will have a much deeper effect. As an aside, it is interesting that just a few months ago the President thought the Federal Minimum Wage should go to $9.00 by 2015!

Following the President's vision, just a few days ago on March 27^th, Connecticut increased its Minimum Wage to $10.10 beginning in 2017. (For 2014, Connecticut's rate is $8.70 with annual increases to the $10.10 rate in 2017.) At this time, there are twenty-one States and the District of Columbia with Minimum Wages that exceed the current Federal rate of $7.25 with the top four being: Washington State at $9.32, Oregon at $9.10, Vermont at $8.73 and Connecticut at $8.70.

Companies with employees at pay rates less than the proposed Minimum Wage will face a severe problem. Companies not employing anyone at the old or even the proposed Minimum will also be affected, but it will take a little longer.

Any increase in the Minimum Wage will be disruptive and cause economic problems by itself. When added to the additional tax burdens (corporate and personal) that are also being proposed, the hike in the income taxes, the additional taxes for Obamacare, the penalties under Obamacare, and policies that are increasing the prices of fuel and electricity, both large and small companies will be facing escalating challenges.

Mandating the proposed Minimum Wage will result in severe "Wage Compression" as the difference in pay between lower level positions is often 3-5%. Wage Compression occurs when the pay for lower paid positions is increased to nearly equal, equal or surpass the pay for the next higher position. This causes morale, performance and turnover problems. I have experienced a case in which such compression brought about union organization by the folks who were in the previous higher positions.

E.g. an employee makes $7.25/hr. The Minimum Wage goes to $10.10 as proposed by the President. The next higher position is paid at $8.25 and would also have to be increased to at least $10.10, or to keep order and not have those employees complain or do less work, that position would have to be increased to $11.10. As you can see, this has a domino effect. Added to that is the additional cost for FICA, Medicare, UI, Dbl, and other mandated or voluntary expenses that are linked to pay. For labor intensive businesses (which most of the companies in the US now are) this increase could severely decrease or eliminate profits.

The only ways to counter that additional expense are to increase prices, decrease hours of work, terminate employees and have the others do their work (this may not always be possible), or to do nothing and let the business flounder and eventually go under. None of these are acceptable.

Raising prices may result in less business and the necessity of firing an employee or going out of business - at the very least it is inflationary as prices are increased without additional goods or services being produced in return. Firing an employee hurts the very people the President's proposal intends to help and places an additional unemployment and Medicaid burden on those continuing to work. Going out of business expands the unintended consequences of the President's proposal.

Now let's look at how linking increases in the Minimum Wage to the CPI will actually hurt our economy by creating a vicious circle that feeds on itself. If the CPI increases, the Minimum Wage increases. The increase in the Minimum Wage causes prices to go up which drives up the CPI. The increase in the CPI causes the Minimum Wage to go up.....and so on. The President and his supporters will argue that all this does is to keep the Minimum Wage in the same relative position. However, they will ignore the fact that Minimum Wage jobs and those just above the Minimum Wage will start to disappear as companies try to find ways to shrink the number of these positions, replace them with automation or send jobs overseas through business brokers or by opening facilities there. This will make it harder for the unskilled and under-educated to find jobs. The Administration ignores the fact that this proposal will accelerate the rate of inflation thereby hurting those who it intends to help - remember that the CPI is a lagging indicator (the President will argue that this relieves the legislature from a regular review of the Minimum Wage and will keep it in the same relative position). The Administration ignores the fact that if a business cannot find employees at the Minimum Wage the business will pay more. The business world will adapt so, in effect, the actual minimum wage (notice no initial caps) will increase over time.

Now is the time to inform your Congressperson of your position on this issue. You can reach them through these links: 

Senate: http://www.senate.gov/general/contact_information/senators_cfm.cfm  

House: https://writerep.house.gov/writerep/welcome.shtml  

Our staff has had experience with increases in the Minimum Wage in different venues and would be pleased to assist you in restructuring your compensation and benefits packages to accommodate the proposed increase when it becomes law. 

Sincerely,