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This Is Why Stagnant Working Class Wages Are Unsustainable...


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On the other hand, when we look at minimum wage indexed to 1996 dollars (IOW, adjusted for inflation), the chart looks more favorable to the argument that minimum wage is correlated with inflation:

http://www.freeimage...loads/1987r.jpg

On the other, other hand, I ran a statistical model that is called a "Granger Causality Test" where lagged values of minimum wage are correlated with current values of inflation. The idea is that the one can only cause the other if inflation increases occur some number of years AFTER minimum wage increases. The lag is open to interpretation, but after looking at some cross-correlation analyses, the only statistically significant lags are one year and two years, respectively. So I ran a Granger causality test for each lag.

For a lag of two years, the results were clearly not statistically significant. In other words, an increase in the minimum wage is not correlated with an increase in inflation two years later. The same is true for a one-year lag. However, for the one year lag, the p-value is .128. What this means is that there's an 87.2% chance that an increase in the minimum wage causes an increase in inflation one year later. With an N=58, that's actually close enough for me to suspect there might be an actual relationship there.

Put simply, when we're talking about inflation-adjusted minimum wage, there might actually be a small increase in inflation. It's not very strong evidence, but it's close enough for me to suspect a real effect. But the effect itself is not very large, at least not according to my (very tentative) analysis. Increasing the minimum wage this year to $10.25 would, according to my (very tentative) models, increase inflation by only about 1% next year.

What I'm not able to say is how long the initial "shock" would linger in the economy. I don't have time and frankly I don't have the inclination right now to delve into how long the effect wears off. But to summarize, it's possible that raising the minimum wage would increase inflation, but the effect is only marginally significant (though with a small number of years to observe, that leads me to suspect a real effect) and the actual impact appears to be relatively small. Put simply, there may be an effect, but even a $3.00 increase in the current minimum wage is not going to send inflation spiraling out of control.

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And one last thought, the fact that an increase in the minimum wage appears to have an effect on inflation one year later, but not two years later, suggests to me that the effect is very short lived. I might be misunderstanding the nature of Granger causality tests here, but I'm pretty sure that's a credible interpretation of my regression models.

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Had more to do with Carter vs Reagan than minimum wage.

Beginning in 2007 when the largest wage increase in history began it's climb from 5.35 to 7.25, the inflation rates are as follows.

2.8

3.8

0.4

1.6

3.2

2.1

1.5-2013

That was an anomoly partly due to the financial crisis. Housing expenses are highly influential due to them being a significant portion of the equation calculating inflation. Food is somewhere around 15% and I believe housing is 40%.

As I said before, this is not proof but it is evidence. Maybe it's anecdotal and I'd have to be an economist to really drive down into each year to see all of the contributing factors.

A portion of it is common sense though. McDonalds will not accept losing profits. If they did, their stock price would go down and it would hit the pockets of every person on their board and upper mgmt. If they can't find a way to make up for the higher wages, they would raise prices. Since it is a franchise, it's not as simple as cutting the pay of their officers and their bonuses. Franchisees are going to get the brunt of the increased wages because they are managing their restaurant where they are employed. McDonalds would have to find a way for the franchisee to keep their profits in order for their model to work.

Also note that in my post, I did refer to drastic increases in minimum wage having this effect.

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That was an anomoly partly due to the financial crisis. Housing expenses are highly influential due to them being a significant portion of the equation calculating inflation. Food is somewhere around 15% and I believe housing is 40%.

As I said before, this is not proof but it is evidence. Maybe it's anecdotal and I'd have to be an economist to really drive down into each year to see all of the contributing factors.

A portion of it is common sense though. McDonalds will not accept losing profits. If they did, their stock price would go down and it would hit the pockets of every person on their board and upper mgmt. If they can't find a way to make up for the higher wages, they would raise prices. Since it is a franchise, it's not as simple as cutting the pay of their officers and their bonuses. Franchisees are going to get the brunt of the increased wages because they are managing their restaurant where they are employed. McDonalds would have to find a way for the franchisee to keep their profits in order for their model to work.

Also note that in my post, I did refer to drastic increases in minimum wage having this effect.

Look at my past two posts. That's as close as you're going to find on these boards to how an economist would approach the question. You're overstating the degree to which an increase will affect inflation, but there's reason to think there is a macro level effect. Some of the costs will be passed on in the form of higher prices, but I also think that you're overstating the percent of expenditures that are due to wages. A lot of these fast food places only spend 30-35% of their income on wages and benefits to workers. People have this conception that almost all of their expenditures are on wages, so increasing wages cuts deeply into profits. That's just not true. The CEO of Papa John's, for example, admitted that providing health care to all of his workers would only increase the cost of a pizza by 15 cents (Forbes later studied it and says it's more like 5 cents). Increasing their salaries might similarly increase the cost of pizza, but it's not going to be astronomical. Put simply, doubling worker salaries is not going to double the price that companies charge for their products. Not by a long shot.

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That was an anomoly partly due to the financial crisis. Housing expenses are highly influential due to them being a significant portion of the equation calculating inflation. Food is somewhere around 15% and I believe housing is 40%.

As I said before, this is not proof but it is evidence. Maybe it's anecdotal and I'd have to be an economist to really drive down into each year to see all of the contributing factors.

A portion of it is common sense though. McDonalds will not accept losing profits. If they did, their stock price would go down and it would hit the pockets of every person on their board and upper mgmt. If they can't find a way to make up for the higher wages, they would raise prices. Since it is a franchise, it's not as simple as cutting the pay of their officers and their bonuses. Franchisees are going to get the brunt of the increased wages because they are managing their restaurant where they are employed. McDonalds would have to find a way for the franchisee to keep their profits in order for their model to work.

Also note that in my post, I did refer to drastic increases in minimum wage having this effect.

And note that I noted it was the largest increase in history without any real effect on inflation.

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Look at my past two posts. That's as close as you're going to find on these boards to how an economist would approach the question. You're overstating the degree to which an increase will affect inflation, but there's reason to think there is a macro level effect. Some of the costs will be passed on in the form of higher prices, but I also think that you're overstating the percent of expenditures that are due to wages. A lot of these fast food places only spend 30-35% of their income on wages and benefits to workers. People have this conception that almost all of their expenditures are on wages, so increasing wages cuts deeply into profits. That's just not true. The CEO of Papa John's, for example, admitted that providing health care to all of his workers would only increase the cost of a pizza by 15 cents (Forbes later studied it and says it's more like 5 cents). Increasing their salaries might similarly increase the cost of pizza, but it's not going to be astronomical. Put simply, doubling worker salaries is not going to double the price that companies charge for their products. Not by a long shot.

I don't think it would be a linear affect. You did a good job charting it. I am not the "OH MY GOD YOU ARE DESTROYING THE COUNTRY" type of person. I would agree with subtle increases in minimum wage because I think they are over-do. I don't agree with drastic changes because they are less predictable, they make people panic, and the desired results are never what ends up happening.

Franchise business models are a perfect example for discussion. For Papa Johns it might average out to $0.05-$0.15 per pizza across their business. An individual restaurant might make $150k in net profit per year. If you doubled minimum wage for 3 full time employees, it takes away 1/3rd of their annual net. You might think, well, they are still making $100k per year. It's not that simple though. The franchisee has to invest a lot of money to open that store and that reduction in net is going to be reflected by their willingness to invest in opening a Papa Johns. Corporate will respond by raising prices across the board to keep the profit margins appropriate for the price of opening a store. It wouldn't be linear, as in the prices wouldn't double, but everybody would see their cost of living increase.

An even bigger risk is the masses in the market panic. Stock prices drop due to new projections before policy changes. The value of the dollar drops because there's more printed in circulation, which raises the costs of all goods. This would also cause imports to cost us more and we would get paid less for exports.

I'm not saying this would happen at catastrophic levels. I am saying these are real risks that would have to be considered and mitigated before anybody could take a serious look at doing something drastic to minimum wage.

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I don't think it would be a linear affect. You did a good job charting it. I am not the "OH MY GOD YOU ARE DESTROYING THE COUNTRY" type of person. I would agree with subtle increases in minimum wage because I think they are over-do. I don't agree with drastic changes because they are less predictable, they make people panic, and the desired results are never what ends up happening.

Franchise business models are a perfect example for discussion. For Papa Johns it might average out to $0.05-$0.15 per pizza across their business. An individual restaurant might make $150k in net profit per year. If you doubled minimum wage for 3 full time employees, it takes away 1/3rd of their annual net. You might think, well, they are still making $100k per year. It's not that simple though. The franchisee has to invest a lot of money to open that store and that reduction in net is going to be reflected by their willingness to invest in opening a Papa Johns. Corporate will respond by raising prices across the board to keep the profit margins appropriate for the price of opening a store. It wouldn't be linear, as in the prices wouldn't double, but everybody would see their cost of living increase.

An even bigger risk is the masses in the market panic. Stock prices drop due to new projections before policy changes. The value of the dollar drops because there's more printed in circulation, which raises the costs of all goods. This would also cause imports to cost us more and we would get paid less for exports.

I'm not saying this would happen at catastrophic levels. I am saying these are real risks that would have to be considered and mitigated before anybody could take a serious look at doing something drastic to minimum wage.

Papa John's is a bad example. Those ******** already have us more than paying their employee wages with that 'delivery charge'. **** Papa John's

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And note that I noted it was the largest increase in history without any real effect on inflation.

As a percentage of the year before, not even close. Dollar amount, yes, but raising minimum wage $0.75 right now would be the largest ever in one year, but it would only be a 10% increase. The one I showed correlating to the 70's was a 25% increase in minimum wage.

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So you think this model of business is sustainable?

I don't think any model of business is sustainable. Business has to evolve as the landscape changes. I think more of it needs to be done at the state and even the local (city/county) level, not the Federal. Federal changes effect the entire country and the reason I used the franchise example is to demonstrate how a national change can have adverse effects to the smaller markets that are hit much harder by them.

For example, the cost of living in Manhattan is so much higher than La Grange, Ga. The minimum wage should be set accordingly in order to address the needs of the area. Some might argue that Walmart and McDonalds would not open in those areas because of the extra operating expenses. If those businesses want to have access to that dense population where they generating that much more business, they will be able to absorb the costs without raising prices.

To be continued...

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I don't think any model of business is sustainable. Business has to evolve as the landscape changes. I think more of it needs to be done at the state and even the local (city/county) level, not the Federal. Federal changes effect the entire country and the reason I used the franchise example is to demonstrate how a national change can have adverse effects to the smaller markets that are hit much harder by them.

For example, the cost of living in Manhattan is so much higher than La Grange, Ga. The minimum wage should be set accordingly in order to address the needs of the area. Some might argue that Walmart and McDonalds would not open in those areas because of the extra operating expenses. If those businesses want to have access to that dense population where they generating that much more business, they will be able to absorb the costs without raising prices.

To be continued...

I think most people who support raising the minimum wage agree with the second paragraph. If people (not you necessarily) can get over their ideological platitudes, then we might be able to solve some real problems in this country. When people say this model of business isn't sustainable, they're not just talking about the success of the business. A lot of us are talking about sustainability in terms of the broader societal and economic effects this has on the country. Look at the countries that have the highest levels of inequality - they tend to be banana republics that are plagued by poverty, instability, political violence, environmental problems, and other serious issues. That's what happens when the majority of the country lives in extreme poverty while a few see the benefits of economic growth.

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On the inflation being caused by minimum wage thing, I suppose that my view is that inflation isn't a big deal if wages are significantly outpacing the rise in inflation. At some point things have to level off (and they appear to after a year), so if we wind up increasing minimum wage to $15 over the course of a decade and inflation grows half a percent or even a whole percent more during that time, at the end of the day workers will have more money even after inflation than they do now. And they're going to put that money back into the economy, which means that GDP would probably grow along with it. In fact, I'm going to pull GDP numbers and see if there's any effect for that, too.

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I think most people who support raising the minimum wage agree with the second paragraph. If people (not you necessarily) can get over their ideological platitudes, then we might be able to solve some real problems in this country. When people say this model of business isn't sustainable, they're not just talking about the success of the business. A lot of us are talking about sustainability in terms of the broader societal and economic effects this has on the country. Look at the countries that have the highest levels of inequality - they tend to be banana republics that are plagued by poverty, instability, political violence, environmental problems, and other serious issues. That's what happens when the majority of the country lives in extreme poverty while a few see the benefits of economic growth.

Those countries have a different definition of extreme poverty. I don't think it's fair to compare poverty in the US to poverty in India, for instance.

I do think people should start looking more at the state and city governments to fix more problems than the federal. Most states follow the federal minimum wage requirements, but that is not sufficient for many of them. Doubling the federal minimum wage could adversely affect many communities throughout the country.

Let me put it another way. I would rather the federal government not even have a federal minimum wage. They could mandate that state or city governments base their minimum wage on the cost of living in their area. Cities like LA couldn't have workers getting paid slave like wages. Local businesses could be more viable in cities like Flint, Michigan. Small towns wouldn't be handcuffed by the federal government mandating wage increases that can't be absorbed due to the small market they are trying to operate in. And big markets provide more livable wages.

That is the right solution in my opinion. The fed is way too broad and our country is way too diverse economically for the fed holding the responsibility of setting a minimum number people should get paid.

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Those countries have a different definition of extreme poverty. I don't think it's fair to compare poverty in the US to poverty in India, for instance.

I do think people should start looking more at the state and city governments to fix more problems than the federal. Most states follow the federal minimum wage requirements, but that is not sufficient for many of them. Doubling the federal minimum wage could adversely affect many communities throughout the country.

Let me put it another way. I would rather the federal government not even have a federal minimum wage. They could mandate that state or city governments base their minimum wage on the cost of living in their area. Cities like LA couldn't have workers getting paid slave like wages. Local businesses could be more viable in cities like Flint, Michigan. Small towns wouldn't be handcuffed by the federal government mandating wage increases that can't be absorbed due to the small market they are trying to operate in. And big markets provide more livable wages.

That is the right solution in my opinion. The fed is way too broad and our country is way too diverse economically for the fed holding the responsibility of setting a minimum number people should get paid.

Did you just say 'States Rights'?

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Those countries have a different definition of extreme poverty. I don't think it's fair to compare poverty in the US to poverty in India, for instance.

I do think people should start looking more at the state and city governments to fix more problems than the federal. Most states follow the federal minimum wage requirements, but that is not sufficient for many of them. Doubling the federal minimum wage could adversely affect many communities throughout the country.

Let me put it another way. I would rather the federal government not even have a federal minimum wage. They could mandate that state or city governments base their minimum wage on the cost of living in their area. Cities like LA couldn't have workers getting paid slave like wages. Local businesses could be more viable in cities like Flint, Michigan. Small towns wouldn't be handcuffed by the federal government mandating wage increases that can't be absorbed due to the small market they are trying to operate in. And big markets provide more livable wages.

That is the right solution in my opinion. The fed is way too broad and our country is way too diverse economically for the fed holding the responsibility of setting a minimum number people should get paid.

i wonder how that would be in towns like in West Virginia where there is like 1 employer and they control most of a town. I actually agree with you, but I think there will be like all things gov related "unintended consequences".
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i wonder how that would be in towns like in West Virginia where there is like 1 employer and they control most of a town. I actually agree with you, but I think there will be like all things gov related "unintended consequences".

The city has to answer to the state. The state has to answer to the fed. If the city gets manipulated into making their minimum wage the equivalent of slave labor, they face consequences with the state and fed. If the federal system mandates local governments establish their minimum wage based on cost of living, I'm not sure how a business can manipulate that unless they bought up all of the grocery stores and land to make the cost of living plummet, lowering the minimum wage. The problem if they did do that is they would still have to sell groceries and land at that extremely low price, and investors would buy it low to rent it, so the business would lose money hand over fist in order to try to make it up in a lower minimum wage. It wouldn't make sense for them because at best, it would be a temporary manipulation.

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And now the cuts in Food Stamps is going to hurt Walmart's bottom line:

Walmart struggled at the end of last year. But according to the retailer's new estimations, it wasn’t because people didn’t want to buy. It was because they couldn’t.

The retail giant warned Friday that the effect of last year's national food stamp cuts on its bottom line will likely be deeper than the company previous estimated. As a result its comparable same-store sales -- an retail metric that measures how stores are doing year over year -- will likely be slightly down for the fourth quarter.

“The sales impact from the reduction in SNAP [the U.S. government Supplemental Nutrition Assistance Program] benefits that went into effect Nov. 1 is greater than we expected,” Walmart’s Chief Financial Officer Charles Holley said in a news release Friday. “And, second, eight named winter storms resulted in store closures that impacted traffic throughout the quarter.”

The GOP-led push to cut the food stamps benefits to the tune of $5 billion left 47 million Americans reeling during a time of nearly record-level food insecurity.

Because about 18 percent of all total food stamp dollars are spent at its stores, according to an October report from the Wall Street Journal, Walmart can serve as a way to gauge how Americans are coping.

Walmart executives were cautiously optimistic about the effects of the cut on Walmart's bottom line last year. "Everybody's benefit is going to get cut, price will become more important. And when price is more important, we're more relevant," Bill Simon, the retail giant’s U.S. CEO, said in October. He noted that Walmart’s market share actually decreased when the food stamp program initially expanded in 2009.

But the opposite didn’t hold hasn't held true so far, indicating that the poorest Americans are so pinched they can’t even afford to shop at the cheapest retailers. Family Dollar, another typical destination for Americans in a squeeze, also reported disappointing earnings earlier this month, which they blamed on factory including food stamp cuts, high unemployment and the payroll tax increase.

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