Historically, I have been pretty anti an increase in minimum wage, in the fact that the free and open market should determine what the fair price of labor should be. In the past years though I have been thinking that there are a few ways to deal with an influx of cheap foreign labour and needing increase the bottom of the pyramid purchasing power. This coupled by see what income support programs such as bolsa familia are doing in Brazil have really started to bring to light the question what is the balance between income equality, high jobless rates in an open market and increasing resistance to corporate spending.
How are all these tied together, well normally a increase in corporate spending is what drives down the unemployment rate which in turn improves income equality the problem here is we have had a prolonged period of improvement of efficiency within corporations without an improvement of wages thus the income equality has declined leading to less need for hiring new people even though corporate investment has been steady or slowly growing. By some definition this is great, improved efficiency without increasing costs means better corporate profitability. This is true corporate profitability has been at an all time high both in per dollar value but also as a percentage. In the past this would have led to increased corporate expansion and investment but given the governments inability to decide on taxes, healthcare, account practices for how to book investment and just a complete inability to have a stable playing field corporations have decided to hold onto significant cash reservers and returning cash to shareholders rather than investment within itself. (Cash reservers, shareholder buybacks and dividends are all at an all time high) This to contributes to the increase in the decline of income equality.
I think it is time to change the way we calculate or derive what a minimum wage should be, in most cases we discuss minimum wage as an arbitrary number. Lets make the minimum wage $10 or $20 per hour well in that case why not $100 per hour? One often looks at the cost of living adjustment (COLA) as a logical tie for minimum wage increases, which at first glance makes since, if things around you are costing more then why not force an increase in labour but that seems very against my core of open markets. Plus COLA is a horrible trailing indicator since someone has to determine what items drive the cost of living increase and does not do a good job taking into account input substitution amongst other items. Instead I would think it would be a better option to tie minimum wage to regional annual productivity gains. To me this removes the need to address this issue every 10 to 15 years when the equation gets disproportionate. It also allows the wage worker not just the minimum wage earner to participate in productivity gains throughout the country.
Here is a reuters graph of productivity gains since 1973 versus average and median incomes within the US.
An 80% increase in productivity while wage increase has been maintained as rather static for hourly wage workers and there has been an increase of hourly workers have steadily increased over the past 40 years, to the point that now 59.1% of Americans are part of the hourly work force that is an increase of 1.5% since 2008 alone.
If this was coupled with continued investment jobs would have increased but our corporate investment rate has declined steadily since 1999 while our corporate cash reserves have dramatically increased.
If you were to role out a minimum wage increase that is directly tied to productivity increases, while there is some debate as to what the wage would be, minimum wage would increase to someplace between $17-$22 per hour. While this is high and would be cost prohibitive for some businesses the federal government could also give a small and medium size tax credit to offset some of that pain for the first few years while. This tax credit could also be extended to larger companies if it was tied to education or job training. This tax credit should not be maintained for more than 3 years and should decrease over those 3 years.