Here’s Why We Shouldn’t Raise the Minimum Wage the Way We Do It

In many ways, 2014 has been a banner year for living wage advocates in America. States from New Jersey to Massachusetts enacted significant hikes to their minimum wage. Seattle recently passed a law raising its wage floor to $15 per hour by 2017, by far the highest in the nation. And the minimum wage in California jumped to $9 per hour on Tuesday, on its way to $10 per hour by January 1, 2016.

The backlash from the business community has been swift. Seattle’s law is facing a lawsuit, while chambers of commerce across America are rallying to stymie other local attempts to improve pay. In San Diego, where the city council has been mulling a plan to raise the minimum wage to $11.50 by 2017, the local chamber of commerce commissioned a study to illustrate the impact such a wage hike would have on local businesses.

“Labor is the major cost for businesses,” said Sean Karafin, an economic researcher with the San Diego County Taxpayers Association, who authored the chamber’s study. “In addition to paying workers, rises in the minimum wage raise labor-tied costs like the payroll tax. The fear from the business community we’ve heard over and over is that they are going to have to cut back benefits, downsize, or cut hours.”

Karafin argues that the proposed rise in San Diego wages is happening too fast—that the $11.50 figure is arbitrarily high. The city should wait for California’s state plan to take effect, and then figure out a fair metric for future raises.

Since the last time the federal minimum wage was raised in 2009, low-wage workers in America have lost 5.8 percent of their purchasing power to inflation. Wage hikes are clearly needed. But is Karafin right that the scattered and somewhat arbitrary nature of wage hikes we’ve seen in the past year is the wrong way to go about things? Businesses need to get used to the idea that they’re going to see their labor costs rise from year to year, but they also need some metric to plan ahead for those raises.

Other countries, and some municipalities here in America, tie wage increases to inflation. Rather than big one-time boosts, should the minimum wage laws we’re seeing pass across the U.S. do something similar? Would slowly but consistently raising the minimum wage year after year be better than the shocks to the system we’re currently seeing?

Eileen Appelbaum, senior economist at the Center for Economic and Policy Research, has studied minimum wage laws across the world. She believes that linking the minimum wage to inflation, or to some other metric that ensures worker, is crucial.

“Prices rise every year, which undermines buying power of workers,” she said. “The basic point is that you shouldn’t have to wait for government action to get a raise.”

The Australian minimum wage, for instance, automatically rises with inflation every year. American companies seem to have had little trouble adjusting. McDonald’s, for instance, managed to make $260.88 million on $1.54 billion in revenue in Australia in 2011.

Equally important to ensuring wages rise fairly from year to year, according to Appelbaum, is establishing fair baseline pay.

“The international standard for determining a low-wage job is one that pays two-thirds of the median national income,” she said.

Rather than simply boosting wages for inflation, which can lead to onerous labor cost increases at economically vulnerable times, some countries tie their minimum wage to this two-thirds median income metric. France, for instance, sets its wage floor just below the two-thirds figure.

The median income in the United States in 2013 was $51,017. Applying the two-thirds metric would translate to a minimum wage of roughly $16.20 per hour. The Obama administration has been backing a plan to raise it to $10.10 from $7.25—and has met with continuous resistance.

That figure would obviously be too high to earn the support of the likes of Karafin. After surveying the business community in San Diego, he argues that a system like the one San Francisco has developed would be ideal.

Since 2004, that city has raised its wage floor from $8.50 to $10.55 per hour in accordance with local inflation. In economically challenging years, however, wage hikes were forgone, regardless of inflation, to preserve employment.

If San Francisco can pass a minimum wage law that satisfies the business world, a fair but consistent compromise must be available.

Appelbaum argues that effective minimum wages laws can, and do, vary around the world. The key is establishing a law that accounts for both fair baseline pay and rising consumer prices, and that takes these decisions out political hands, which may be beholden to business.

“Organized business raises all kinds of objections to any plan that supports wage increases,” said Appelbaum. “When laws are passed, however, they adjust quickly, and everything winds up being fine.”