Promote Purchasing Power—Not the Minimum Wage

Promote Purchasing Power—Not the Minimum Wage

Promote Purchasing Power—Not the Minimum Wage

sad girl and mom

How to help working families the most

During a focus group session on working class families we recently conducted at the Georgia Center for Opportunity, Jazmine* made an observation more perceptive than most experts.

Our focus group consisted of working-class African-Americans who did not have a college degree and who were not employed in a managerial position nor on track to become a manager. 

Knowing financial stress up close, Jazmine essentially said that either the minimum wage should be increased or the cost of living should be lowered.

Her observation is a perfect segue from my prior blogs on:

 

The Success Sequence provides an outline of how to reverse the cycle of poverty in our communities. GCO uses this as a framework for much of our work.

Promoting Purchasing Power 

The Employment Act of 1946 declared it is the policy and responsibility of the federal government to:

         “promote maximum employment, production, and purchasing power.”

Promoting purchasing power means lowering the cost of living, as Jazmine suggested. 

Solidified in the 1951 Accord with the Treasury Department, the responsibility ultimately fell to the Federal Reserve to conduct monetary policy as we know it today.

How well has the Fed done with promoting purchasing power? Horribly, quite frankly.

Since 1951, prices have increased 3.4% annually on average, as measured by the geometric mean. In other words, the price level was tenfold higher in 2020 than in 1951. Prices doubled each generation.

It is widely accepted that the poor suffer most from inflation because they spend a higher portion of their income on necessities, and their income growth typically lags others. 

For example, according to the most recent mid-year consumer expenditure report from the Bureau of Labor Statistics, consumers in the lowest income quintile spend 82.2 percent of their income on housing, transportation, food, and healthcare, compared to 64.4 percent for the highest quintile. A five percent inflation rate would cost those in the lowest quintile an additional $1,156 for these items on a budget that is already tight, averaging $28,141. A 10% inflation rate would double those costs to $2,312.

Worse, those in the lowest quintile are unable to save for their future, and inflation erodes away the value of the little savings they do have. Consider that on average, those in the lowest quintile purchased only $563 in personal insurance or toward their pensions, compared to $19,736 for those in the highest quintile. This disparity guarantees the poor will be inadequately prepared for retirement or unforeseen loss or tragedy.

 

inflation

Prior to the federal government taking on the responsibility of promoting purchasing power, prices not only remained fairly stable but actually decreased during times of relative peace. Typically, they only increased dramatically during times of war. 

This pattern can be seen visually in the accompanying chart using the Consumer Price Index and related data from the Federal Reserve Bank of Minneapolis. For example, the price level increased 24% due to the War of 1812 but then deflated 57% over 47 years until the start of the Civil War, even after accounting for a slight bump up due to the Mexican War. 

The pattern was similar for the remainder of the century. Prices increased 74% during the Civil War but then deflated 47% to its pre-Civil War level until the start of the 20th Century.*  Although the price level rose somewhat during the progressive era, it was still 30% lower at the start of World War I than at the close of the Civil War.

 

inflation 2

America’s inflationary policy 

Unfortunately, a 1978 law changed promoting purchasing power to become the lame “reasonable price stability,” which is not the same thing.

Over the years, the Fed has allowed inflation as a matter of policy. In 2012, Fed Chairman Ben Bernanke explicitly stated for the first time an inflation target of 2% per year. If the Fed can somehow hold to this target, which it has not been able to do historically, it equates to doubling the price level every 35 years. Last August, it backed away from this policy. Because of all the pandemic spending and monetary expansions, the Fed approved a policy to allow inflation to rise “modestly” above its 2% target. 

It is not just the Fed that has shied away from promoting purchasing power. In 1978, and in the midst of the stagflation years, Congress legislated the modest goal that inflation should be 3% or less, but the target rate was supposed to come down to zero percent by 1988 unless it might have impeded employment.  

The Fed is not alone to blame for the inability of the federal government to control inflation. Congress’s lack of fiscal discipline resulting in soaring budget deficits place the Fed in a tenuous position to keep interest rates low so federal debt service costs also remain low. Furthermore, recent Fed direct purchases of Treasury debt because of all that federal spending adds to the money supply, eroding—not promoting—purchasing power.

 

How Congress can better help the average working family

If economics has any immutable law, it must be that you can’t get something out of nothing. This explains why the Consumer Price Index increased 5.4% since last year, as announced today by the Bureau of Labor Statistics. And the rate of increase appears to be accelerating. The monthly rate was 0.6% in May but 0.9% in June. If this June inflation rate persists, and hopefully it does not, we will have double digit inflation. A 0.9% monthly rate equates to an 11.4 % annual rate.  

Considering all the recent deficit spending by Congress and expansionary policies by the Fed, expect more of the same, or worse. In fact, according to a survey of economists in yesterday’s Wall Street Journal, “Americans should brace themselves” because economists are waking up to the prospect of higher inflation, expecting “brisk price increases for a while.”

Economic history indicates deflation should be the norm. In fact, innovation spawns increased productivity that allows prices to fall, which should show up as deflation. We have the opposite: productivity gains with inflation. This outcome places the blame squarely on monetary and fiscal policy. 

In the meantime, Jazmine and other hard working Americans struggle to keep up with rising prices. Instead of pushing for increases in the minimum wage that help some at the expense of others, Congress needs to renew our nation’s purchasing power policy and get its fiscal house in order. 

 

 

 *Jazmine’s last name withheld for confidentiality.

 

*This is not intuitive. It takes a smaller percent decrease to offset a percent increase, such as a 43% reduction will offset a 74% increase. For example, suppose you receive a 20 percent pay raise this week, but next week you receive a 20 percent pay cut. Are you back where you started? The answer is no; you are worse off. If your weekly pay was $100, the increase took you to $120, but then your pay cut took you to $96, even lower than your starting point.

 

Erik Randolph is the Director of Research at the Georgia Center for Opportunity.

 

Putting Georgia’s employment numbers in perspective

Putting Georgia’s employment numbers in perspective

Putting Georgia’s employment numbers in perspective

homeless no job

Is there any reason not to cheer? Georgia’s unemployment rate dropped to 4.1 percent in May. 

Here are three reasons why this looks good for Georgia. 

First, the unemployment rate is declining, giving optimism that the economy is bouncing back from the pandemic.

Second, there were only two periods in recorded history when Georgia’s unemployment rate was this low or lower. Starting from 1976—the extent of available data from the U.S. Bureau of Labor Statistics (BLS) on unemployment rates for the states—the first period was between October 1998 and July 2001 when the rate reached as low as 3.4 percent. This period occurred after the long economic expansion of the 1990s. 

The other period—from April 2018 to the start of the pandemic—just occurred with Donald Trump in the White House. During this period, Georgia broke its best record by achieving 3.3 percent.

Third, Georgia’s rate is the 16th lowest in the country, beating out 34 other states. For comparison, the United States as a whole has a rate of 5.8 percent rate, considerably higher than Georgia’s.

 

 

But wait. Is the unemployment rate artificially low?

While optimism is merited, it is important to put the unemployment numbers in perspective.

Unemployment percentages do not capture those who do not participate in the labor force. According to the BLS, anyone not employed who had not actively looked for a job during the prior four weeks is not part of the labor force. Therefore, any person temporarily not looking for work is not accounted for when the BLS calculates the official unemployment rate. Especially now with all the repercussions of the pandemic, all those potential workers who have been sitting on the sidelines for the last four weeks are simply not counted.

The behavior of labor force participation is a loose link for unemployment numbers. Normally, when economic times are good, sidelined workers and even retirees come back into the labor force, which can push the unemployment rate up. When times are bad, the opposite happens. Workers drop out of the labor force, artificially lowering the unemployment rate.

During the depth of the pandemic, and as expected, the labor force participation rate in Georgia dropped—to 59.4 percent to be precise, compared to 62.9 percent just prior to the pandemic. In terms of real people, there were an estimated 260,575 fewer workers participating in the labor force—who were not counted among the unemployed, to emphasize the point. Participation bounced back some to 61.7 percent, but still there are 40,934 fewer workers in the labor force.

Other ways to measure it

BLS’s U-6 labor underutilization metric is another way to shed light on unemployment. It adds to the unemployed those discouraged and other “marginally attached” workers as well as part-time workers wanting full-time work but cannot find it. 

Nationally, the U-6 rate hit a historic high of 22.9 percent in April 2020 representing 36.3 million people. It has since dropped to 10.2 percent representing 16.5 million people. However, in the months prior to the pandemic, the rate was at historic lows—in fact, as low as 6.8 percent. Obviously, while 10.2 percent is far better than 22.9 percent, it is significantly worse than 6.8 percent, representing a difference of 5.3 million workers.

Unfortunately, monthly U-6 data is not available for the states, making any comparison difficult. The BLS currently publishes only experimental U-6 state data averaged over a year’s time.

More useful for the states is the Nonfarm Employment estimates from BLS’s Current Employment Statistics survey. Only two states—Utah & Idaho—have caught up with employment from where they were in February 2020 before the pandemic hit. In contrast, the U.S as a whole is still 5% behind. Georgia ranks 16th among the states and is 4.0 % behind. Hawaii (-14.8%), New York (-9.6%), and Nevada (-8.6%) are the three states furthest behind. 

If we use standard economic ARIMA Model time-series forecasting to estimate where employment would have been absent the pandemic, no state is back on track. The United States is 6.8% behind, and Georgia ranks near the middle in 27th place at −6.1%. Utah and Idaho lead the pack being the furthest ahead, while Hawaii, Nevada, New York, California, and Massachusetts trail the pack.

Observations on state differences and policies

In viewing the differences in employment among the states, the more rural states appear to be doing better. The states more dependent on tourism appear to be doing worse. State governments that implemented less severe lockdowns appear to be doing better. To test these observations, we will be running regression analyses to tease out any correlations. We will post the results when completed.

In the meantime, it is important for government to adopt policies that will help businesses to rebound and make it easier for startups. The goal should be not to just lower unemployment but also to bring those sidelined workers back into the labor force.


Erik Randolph is the Director of Research at the Georgia Center for Opportunity.

Benefiting Low-Wage Workers without Minimum Wage Laws

Benefiting Low-Wage Workers without Minimum Wage Laws

Benefiting Low-Wage Workers without Minimum Wage Laws

3 female waitresses

Strategies to help everyone

If it is a bad idea to raise the minimum wage, or even have a minimum wage law to begin with, where does this leave the low-wage worker?

We already examined the empirical evidence showing that minimum wage laws reduce employment among the groups the laws are intended to help. (If you missed it, check out my blog.)

We also looked at the negative impact on small business—that most important job-creation engine. (Check out this blog.)

Now we want to know what we can do to help low wage workers. 

A job is better than no job 

True. Some workers earning a minimum wage will find themselves better off with a law that increases their pay. However, millions others will be hurt. Some are harmed because their hours might be reduced. Worse, many others will not be able to find a job or lose their job. The nonpartisan Congressional Budget Office predicted this number will be 1.4 million people if the federal $15 minimum wage proposal becomes law. 

If you cannot find a job or lose your job, you are not better off. This is especially true for workers starting out in the labor force. They learn things on the job that they cannot learn in a classroom or at home. 

They learn the all-important soft skills required to function in the workplace, such as getting along with coworkers, meeting expectations, and showing up on time prepared for work.

Importantly, they also begin building their net worth. At a minimum, they do this by putting away for their future with contributions—matched by their employer—to Social Security and Medicare. 

No minimum wage law does not mean no standard

The minimum wage is an arbitrary number with little meaningful relationship to the particulars of a specific job. The United States has nearly 6 million business firms with 7.9 million establishments in thousands of industries in over 3,000 counties, according to the Economic Census. Each has its own characteristics in terms of expectations, skills, and pay.

One of my first jobs was in a machine shop. I still recall how the employer misrepresented the minimum wage when he hired me. He tried passing it off as a pay level sanctioned by the federal government. I did not buy it and was offered higher pay. Later I learned others in the shop fell for his ruse—and were receiving just the minimum wage. 

If we would eliminate the minimum wage law, then low-wage workers would look to other standards reflective of the job and industry. 

Think of Kelley Blue Book that helps consumers know the value of a car. There are also companies—like PayScale—helping job seekers know what to expect in terms of pay.  Moreover, the U.S. Bureau of Labor Statistics conducts 12 surveys on pay and benefits—including wage data for over 800 occupations by area—that can be used as guidance. 

It would be better for workers to have knowledge about pay scales based on real factors than rely on arbitrary and artificial standards set by government law.  

The Success Sequence provides an outline of how to reverse the cycle of poverty in our communities. GCO uses this as a framework for much of our work.

Career ladders and skill sets

The Georgia Center for Opportunity works with community groups helping job seekers link with employers. Setting career goals, understanding the skill requirements of various occupations, and having realistic expectations of pay are all important components of putting together a plan to help job seekers grow in their career and compensation.

These plans are what will help them the most if they are stuck in a minimum wage job. It gives them a plan of action on how to meet their goals. It also helps employers who often complain they can’t find good help with the skill sets they really need. This solution involves working with individuals on a one-on-one basis. 

It also takes time—there is no magic button to push. However, in the end, it will be a win-win situation for both workers and employers. Raising the minimum wage is a win-lose situation—some people will win, but many others, including the overall economy, will lose.

Understanding the needs of employers in the labor market also requires us to do a better job at education in preparing our children for their future. As research has shown, giving parents more choices improves the quality of education—and will ultimately benefit our children and society. 

We need to stop coming up with solutions that help some people at the expense of others. It makes little sense to damage the entrance ramp to employment in order to increase the pay for just some workers. Or for the government to have an inflation policy that hurts the poor the most, which I pointed out in this blog

Instead, let’s focus our attention on solutions that help everyone. If you have comments, especially on what are the best solutions, we would love to hear from you. Be sure to post them in the comments.

 

*Erik Randolph is Director of Research at the Georgia Center for Opportunity. This blog reflects his opinion and not necessarily that of the Georgia Center for Opportunity.

 

Why the Minimum Wage is Bad News for Small Business

Why the Minimum Wage is Bad News for Small Business

Why the Minimum Wage is Bad News for Small Business

payday

Why that’s bad for everyone else, and how raising costs can have disastrous economic consequences.

In a prior blog, I explained how empirical research supports the side of the debate asserting negative consequences due to minimum wage laws. Now we’ll look under the hood to understand more why this might be the case.

After the stock market crash of 1929—yes, I’m taking you back that far—President Herbert Hoover rolled into action to get the U.S. economy out of the recession that would become the Great Depression. Among his activities were efforts to boost prices and wages, including White House conferences to cajole business leaders to maintain wage rates. 

His successor, Franklin D. Roosevelt, went further to promote higher prices and wages, especially with the Wagner Act intended to strengthen labor unions and the National Industrial Recovery Act (NIRA) that established a system of industry cartels that regulated, among other things, wages and prices. 

In 1935, the U.S. Supreme Court struck down the NIRA. In response, the minimum wage became a platform issue for his 1936 reelection campaign, and FDR succeeded in getting a federal minimum wage of 25¢ per hour in 1938.

Economists seemingly agree on little, but one thing they do agree on is that the policies of Hoover and Roosevelt did nothing to get the U.S. out of the Great Depression. Keep this history in mind when you hear advocates who want to raise the minimum wage. 

Importance of small business

Small businesses are at the heart of the American economy. They are a major engine of prosperity and job growth, enriching society and helping to spread wealth at a time when economic disparities are receiving more attention. 

Examples of small businesses are too many to list but include your local restaurant, hair salon, construction firm, dentist, bakery, and small-town law firm. It also includes many franchisees who may own your local McDonald’s, Subway, UPS store, hardware store, senior home care service, or handyman service. 

 

worker and coin stacks

According to the U.S. Small Business Administration

  • There were 31.7 million small businesses in the U.S. in 2017.
  • They employed 60.6 million people, or 47.1 percent of the private workforce in 2018. 
  • That number included 4.2 million self-employed persons of color.

Small businesses created 1.6 million net jobs in 2019.

Not all about profits

Also according to the Small Business Administration, there were 249,000 business start-ups creating 863,000 new jobs in 2018. However, those gains were partially offset by 222,000 businesses shutting down, taking 762,000 jobs with them. 

This comparison is a good way of exposing a common myth about economics: It is not all about profits. It is also about losses. 

If you took an economics course in college or high school, you probably found yourself spending time looking at the impact of losses and how much a business can lose before it must shut down.

What it takes to run a small business 

Running a small business is hard. It requires dedication, resources, and daily decisions to keep operations viable without the benefit of an array of professional managers and departments that large businesses typically have. When a small business owner makes a mistake, he takes a direct hit. If the mistake is large enough, it could threaten his or her livelihood.

Politicians, on the other hand, can make a policy mistake impacting business, but they do not take a direct hit. Because every business is different, it is impossible for politicians to know what it takes for every type of business to stay viable and make a profit. Yet changes in government regulations, taxes, and wage laws can have devastating impacts on businesses.

The ability of businesses to withstand changes in minimum wage laws depends on the circumstances of the business and their profitability. It is naive to assume that every business relying on low-cost labor would be able to pay its employees more just because the government mandates them to do so. 

Many businesses operate on thin profit margins. If their costs go up, they may substitute technology for labor, if they can, which naturally and unfortunately results in workers losing their jobs. 

Worse, the business may have to shut down. It makes no sense to expect businesses to continue operating if they are losing money. Many small business owners who shut down may need to find a job themselves or risk landing in poverty. This helps no one, least of all the laid-off employees.

Final warnings

Beware of large corporations like Amazon or Walmart who might support minimum wage laws. It could be because they see it as a way to drive out competition from small mom and pop businesses.

Forcing small businesses to raise wages, especially after they sustained a financial hit from a pandemic, only promises to weaken an all-important job growth engine for the U.S. economy at a time when we need to bolster the small business sector and get the economy rolling again. This strategy of mandating wage increases certainly did not work out well during the Great Depression. There is no good reason to think it will work now.

So, what do our state and national legislators need to be doing? They need to concentrate on getting the economic job engine revving up again, and this is done by finding ways to reduce costs for businesses (not raising them), making it easier for entrepreneurs to start their own businesses (not making it harder), and making sure the financial markets are working properly so small businesses can access much-needed funds.

Where does all this leave the worker stuck in a low-wage job? Stay tuned. I’ll answer that question in my next blog. 

 

*Erik Randolph is Director of Research at the Georgia Center for Opportunity. This blog reflects his opinion and not necessarily that of the Georgia Center for Opportunity.

 

Let’s Take Politics Out of Healthcare

Let’s Take Politics Out of Healthcare

Let’s Take Politics Out of Healthcare

healthcare politics

The federal government’s surprise move against Georgia

In a raw political move, the Centers for Medicaid & Medicare Services (CMS) removed the approval of Georgia’s Pathways to Coverage, labeling the program as “pending.” 

Despite the fact that the COVID-19 vaccine rollout is consuming the resources and attention of the Governor’s office and the Department of Community Health, CMS gave Georgia only 30 days to respond before the federal government might eviscerate the program. In its February 12 letter, CMS targeted the program’s work or other community engagement components and also threatened “review” of other provisions of the program. 

This move by the new administration in Washington, D.C., appears to be unprecedented. Finally secured last fall, the approval was part of an administrative process, which included time for public comments, that took years to develop. 

Pathways to Coverage serves non-disabled adults below the poverty line. It is a critical component of Georgia’s plan to reduce the number of uninsured and make healthcare coverage more affordable, without sacrificing quality of care or causing other serious drawbacks associated with a traditional Medicaid expansion. It is based on the idea of not keeping these adults below the poverty line but moving them above it. 

The Success Sequence provides an outline of how to reverse the cycle of poverty in our communities. GCO uses this as a framework for much of our work.

Let’s focus on helping people instead

Pathways to Coverage is really about helping people. Readers might want to check out my prior blog on this program as well as some of our published research on fixing the healthcare system.

The so-called Affordable Care Act (ACA) has caused havoc for Georgians when it comes to healthcare coverage and costs. The rate of healthcare price increases did not abate but accelerated. As we reported before, our own data analysis confirmed other research by showing that for individual markets, “Georgians suffered average price increases of 70.7% for Bronze plans, 77.3% for Silver plans, and 70.4% for Gold plans” over five years.

We also found that prior to the ACA, the median cost for a health insurance plan on the individual market for a family of four was $5,386 per year. But within six years, the cost varied from $17,550 to $26,081, depending on the level of the plan. 

The bulk of Georgia’s uninsured problem lies not below the poverty line, but above it. Therefore, Pathways to Coverage necessarily links to Georgia’s Reinsurance Program designed to drive down costs in the individual markets. The test of the demonstration project will be to see how well Georgia can move people out of poverty into situations where they have better opportunities and more resources for health coverage, such as coverage through affordable individual markets or, better yet, employer-based coverage. 

America has one of the world’s best and most innovative healthcare systems, if you have insurance to afford it. By far, employer-based and private insurance provides the best coverage. Medicaid has among the worst healthcare outcomes, can trap families in poverty (as we and others have demonstrated), and can be an obstacle in moving to the much-better private coverage. Incentivizing people to improve their circumstances is an important strategy that this demonstration project hopes to prove. 

The Spirit of the Law

The new administration in Washington might feel like they are doing the right thing by attempting to strongarm states like Georgia into Medicaid expansion. However, this action raises concerns. 

First, the question of whether the federal government can mandate states to expand Medicaid was already settled in the negative by a seven-to-two U.S. Supreme Court ruling. Second, removing a critical component of this demonstration project will not likely accomplish expansion but, if followed through, will compromise the effectiveness of the project. Third, it goes against the whole purpose of demonstration projects. 

Pathways to Coverage is an approved—and hopefully remains so—Section 1115 waiver to Medicaid rules, which is found in the Social Security Act. In enacting this section of the law, Congress acknowledged that a one-size-fits-all approach dictated by the federal government is not always the best way to solve our public policy challenges. 

Congress acknowledged this principle again when it enacted Section 1332 of the Affordable Care Act that allows states to come up with alternative plans in coordination with Section 1115 waivers. Georgia took advantage of both these provisions of law in developing its healthcare strategy. 

Finally, demonstration projects allow states to experiment with what works best. Without experimentation, we hinder our ability to discover better ways to run public programs for the benefit of people. 

What’s next

The best overall resolution would be for CMS to reinstate the approval and allow the demonstration to move forward. CMS will monitor the project, of course, but it must let it play out to see if the project will demonstrate a better way. Georgia has a vested interest in making it work. If not, Georgia could choose to modify or abandon the project. Besides, the federal government will have the opportunity to review the results when the waiver comes up for renewal.

Failure to reinstate the approval will likely result in a legal struggle before the courts. Who knows how long such a legal process will take? Instead of using our resources and time to bicker before the courts, we should apply them to seek out the best ways to improve people’s lives. 

*Erik Randolph is Director of Research at the Georgia Center for Opportunity. This blog reflects his opinion and not necessarily that of the Georgia Center for Opportunity.