The Minimum Wage Dilemma

The issue of raising the minimum wage has always been controversial and with the run up to the November 2016 elections, the rhetoric has become more pervasive and heated.  This is an important issue for investors and, to a lesser extent, consumers.

It seems that the pros and cons of the matter can be summarized as to how much to increase the minimum wage and what affect, if any, will an increase have on employment, particularly for workers at the bottom end of the wage scale.

A recent article in The New York Times suggested that there is some evidence to suggest that increases in the minimum wage, up to approximately 50% of the median wage, are a net benefit to workers.  The median wage for a given area is defined as the mid-point of the income distribution.

Data compiled by the Bureau of Labor Statistics suggests that a $15 an hour minimum wage would be above 70% of the median wage for cities like Detroit, Miami and Atlanta, and, at the other end of the range, below 60% in cities such as San Francisco, Seattle and New York.

In view of the foregoing, it would seem that a one-size-fits-all approach to the minimum wage would do the most harm in the areas least able to afford more unemployment and be largely a nonissue in the strongest metropolitan areas.

Perhaps it would be better to support higher minimums in some markets while maintaining a relatively low base rate nationally.  A less desirable alternative would be to enact regional minimum wages, much as the government currently has regional per diem reimbursement rates for federal and contractor employees.

A more flexible approach to minimum wages could balance the need to provide improving wages without precipitating increases in unemployment.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®