Is It Time To Deflate, America?

With the unemployment rate hovering at 9% and many Americans still out of work, Americans want a minimum wage increase to $10/hour. But is this really the right thing to do at this time?

Public Wants To Raise Minimum Wages

Last week a survey performed by the Public Religion Research Institute revealed that over 2/3rds of Americans are in favor of increasing the minimum wage from $7.25/hour to $10.00. Those that make less than $30,000/year were 74% in favor. In addition, 66% of the families surveyed who made more than $100,000/year agreed.

Minimum Wage History

In 1938 the Fair Labor Standards Act (FSLA) was signed into law, setting minimum wage compensation, a 44 hour work week, and banned child labor. Its purpose was also to set a minimum standard of living for one's well being.

States that have their own minimum wage laws must pay employees the higher of their own or the current Federal rate. In Colorado, for example, they set their minimum wage annually based on the previous year's inflation rate. They base this on their own state's sales data. I believe this is the best way to do it because each state's economy is different. If inflation decreases, the following year's minimum wage decreases as well.

Minimum wage rates have been increasing steadily since the Great Depression. Former President Franklin Delanore Roosevelt made this law when he signed the original FSLA that set minimum wage at $0.25/hour. Today, 73 years later, the labor rate stands at $7.25/hour.

Charting Minimum Wages Through History

Let's take a look at some charts, shall we?

This first chart is a plot of minimum wage and the changes in such over time. The look of this chart is dangerously parabolic in nature:

This second chart contains data points added for each year through time. As you can see, we get a stepped ladder look:

Finally, here's a plot of minimum wage with an inflation index factored in. In this case, I used the Consumer Price Index of 2010. Notice how we get an entirely different look that isn't a straight uphill climb.

What to take from this is that visually, minimum wages, when charted over time, can have a different look and different interpretations. Whether one believes that $1 in 1938 has the same value as $1 in 2010, is left for discussion.

My Thoughts

Minimum wage laws were created to protect workers from being exploited and to keep people above the poverty line for their well being.

I like Colorado's way of determining minimum wage. It doesn't rely upon the Fed's CPI number. It relies on what is going on in their own geographic location. If there is an economic boom in their region, workers are compensated fairly rather than being held down by the entire Union. This way, it is community driven.

My view is that as long as you keep raising wages, you will continue to raise the cost in the standard of living. As Americans, we are encouraged to go out and spend to stimulate the economy..In other words, circulate the greenback and to do it often while the Fed cranks up the printing press to increase the money supply.

The problem is, just how does that benefit the unemployed, the poor, and eroding middle class who can't keep up because prices continue to rise.

I also believe that raising the minimum wage increases unemployment because companies aren't willing to pay higher labor rates that could cut into their profits. And if companies are forced to do so, they'll just pass that onto the consumer therefore contributing to inflation.

Its also hard to bite into the belief that there is no inflation in this country. Just one look at the Consumer Price Index (CPI) since 1938 doesn't actually come off as very convincing.

Prices have never gone down nor stalled. Since the 1970's, they have climbed a good 300%. Politicians and The Fed say inflation is in check. Sorry, I just can't believe it. There seems to be the opposite happening - a strong motivation to keep it going up.

What good is it to keep raising the minimum wage when inflation continues to head up?

Sure, you will put more money in the hands of the lower class and teenage workers. But this just sets precedence for new, more expensive standard of living making it more challenging for the poor, the growing number of senior citizens on limited savings (think Baby Boomers), the existing unemployed, and disabled.

Maybe we are looking at things upside down. Perhaps we should focus on ways to reduce prices instead to allow people to maintain/increase their current standard of living and allow them to purchase more goods and services with what they have. Americans are learning the lesson of saving. Getting them to open up their wallets and spend with no economic catalyst as prices rise just seems fruitless.

About Kerry Kobashi

Kerry is the founder of KerryOnWorld. He lives in Silicon Valley and has worked as an engineer and project manager. He owns Kobashi Computing a consulting company.