Friday, August 8, 2008

Should Mandatory Inflation Raises Accompany A Hefty Minimum Wage Hike?

If we mandate inflation raises for incomes up to $100,000 to accompany a hefty minimum wage raise we could reassure minimum wage skeptics that the higher minimum will not cause a drop in demand. Raising the federal minimum wage two dollars a year for the next three years in a row (a dollar every six months?) should add only about 3% [*] to the cost of GDP output (and to direct inflation) -- causing perhaps 6% overall inflation when other wages pushed up are factored in.

Would we really be looking for something for nothing here (a "minimum wage multiplier"!)? [**] Not exactly. Top 3 percentile incomes have seen 12.4% of overall income shift out of the pockets of below 90 percentile incomes and into their own, since 1973. 3 through 10 percentile incomes about kept even in overall income share over the same decades. Doubling the minimum wage -- with inflation guarantees -- would just be the first link in a chain of downward shifts of income share that could eventually pull all that lost 12.4% back from whence it came.

The share shift follow up to minimum wage doubling can come only from American labor seriously upgrading its bargaining muscle via modernized labor laws and probably, at least a temporary hefty marginal tax hike. Top 10 percentile incomes now eat up 40 percent of overall income (up from 27.5%, 40 years ago), so there is plenty of buying power in the purses of top 10 percentile folks from which inflation bleed back can recapture bottom 90 percentile income share.

Given that top incomes climb exponentially the bleed-chain (if you will) may be able to extend and restore a good way up. Ultimately though, folks now earning 25X more than folks who did similar work 25 years ago are not likely to lose back most of that 2500% gain through 12.4%-25% price inflation (the latter number allowing for some round-robin inflation). An at least a temporary marginal tax hike might need to be thrown in to sufficiently douse decades of overbuilt compensation expectations at the top.

On a 60 minute clock, bottom 20 percentile incomes represent 1 minute and 20 seconds; bottom 50 percentile incomes add up to 8 minutes and 20 seconds. All of which may clear up the mystery of how doubling (!) today's missing-in-action minimum wage could pass potentially unnoticed by those who got neither a minimum ware nor a push up hike. Doubling the minimum wage would shift all of 4.5% income share (3% of GDP cost: about how much the economy grows every few years) to 35% of wage earners -- which would be represented by all of 2 minutes and 45 seconds on an hour clock -- compares piteously to the 20 minutes representing top 5 percentile incomes (up from 12 minutes in 1973).

Buddy, can you spare a few minutes?

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