Wages, wealth, and family welfare

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Dr. Gary Latanich

Emeritus Professor of Economics

On Friday, January 25, the government shutdown ended after 35 days. What was painfully obvious was that a large number of federal employees, without any income, did not have enough savings to survive more than one month. In this regard federal employees are not atypical, at the median savings level 50 percent of American families could not sustain themselves for more than 90 days. Years of continuous work leave too many families with virtually no savings, not surprising in a nation where the bottom 40 percent of income earners control only 0.3 percent of the nation’s wealth while the top 0.1 percent of income earners have more wealth than the bottom 90 percent.

A nation’s wealth is determined by its cumulative productivity. The productivity increases in 2018 determined how much wealthier we were by year’s end. How much of this extra wealth any family can claim is determined by their wage rate. If you’re forced to work for nothing, like federal workers this past month, the increase in your family’s wealth is zero. Thus it’s obvious that wealth which is crucial to retirement and the ability to sustain the family in periods of recession hinges almost exclusively wages and wage growth over time.

It’s the importance of wages that makes the announcement, two weeks ago, regarding the minimum wage so important. Democrats introduced the “Raise the Wage Act of 2019” which, if passed, would raise the minimum wage to $15 an hour, index it to the national median wage so that it doesn’t lose its value over time, and phase out the “tipped minimum wage” of $2.13 per hour. Since the last raise in the minimum wage in 2009, to $7.25, the real wage has declined in value by 9.6 percent.

With the passage of this bill, the minimum income earned by workers, including restaurant food servers, would be $31,200, that’s 50 percent higher than the poverty level for a family of three, which is the average size of a family in the US. As we can see, the importance of legislation that boosts wages cannot be overstated. Since median wages tend to track productivity, an indexed wage would guarantee workers a rising real income and their share of the nation’s increasing wealth. Proof of what could come from this legislation can be seen in the impact that indexing Social Security has had on the poverty rate of seniors. Prior to the indexing of Social Security, the poverty rate of seniors was 35 percent. Today, due to the indexing of Social Security to inflation, the poverty rate among seniors is only 9 percent, the lowest among all age groups.

A second benefit that can be expected from the “tipped minimum wage” provision is a drop in the poverty rate among food service workers especially women who are 70 percent of “tipped” workers. Food service workers suffer the highest poverty rates. They also suffer the highest rate of wage theft. Workers whose “tips” do not sum to “tipped minimum” in any given pay period are supposed to have their check raised to that level. It rarely happens, which is wage theft. For states that adhere to the federal $2.13 “tipped wage” the poverty rate for food servers are 18.5 percent. For states who raised their “tipped wage” to between $2.13 and $7.25, the poverty rate for food servers falls to 14.9 percent. And in states with a “tipped wage” in excess of federally a mandated minimum wage of $7.25, the poverty rate is only 11.1 percent.

Critics of any form of minimum wage hike fall into two categories, those who proclaim it will lead to higher unemployment rates, and those who claim it will create an inflationary spiral.

In 1979, 13.4 percent of the labor force was paid the minimum wage or less, today that figure is 2.7 percent. Over the intervening 40 years, 10.7 percent of the labor force received pay increases that pushed them above the prevailing minimum wage level with no inflationary impact on the economy. Likewise, the only surges we’ve seen in unemployment have been associated with recessions, not years when the minimum wage increases became effective. To put it another way, if 97.3 percent of the labor force can receive regular pay increases with no effect on inflation or unemployment, why should pay increases for the lowest 2.7 percent of paid workers be viewed as such a problem?

In the absence of significant union bargaining power, using the minimum wage to reconfigure how the nation divides our annual increase in wealth is one way to end poverty, insure that families can survive the next recession, and adequately prepare themselves for their retirement years.


Gary Latanich is an Emeritus Professor of Economics at Arkansas State University.

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