The Case for a Nationwide Indexed Minimum Wage

The minimum wage was established with the signing of the Fair Labor Standards Act of 1938 by President Franklin D. Roosevelt. Along with a minimum wage of $.25 an hour, or $4.24 today, the FLSA implemented a 44 hour maximum workweek and outlawed child labor1.

No business which depends for existence on paying less than living wages to its workers has any right to continue in this country…and by living wages I mean more than a bare subsistence level – I mean the wages of a decent living.” – Franklin Delano Roosevelt

Fast forward to 2017: The federal minimum wage since July 24, 2009 has been $7.25 an hour. After inflation, the federal minimum wage has increased 70% in the 79 years since it’s inception. At first glance this seems like real improvement, except when you compare it to cost of living increases over the last 8 decades.

Item Price (1938, USD) Price (2016, USD) % Increase
Average Income $1,731/year $34,940/year 1,918%
New Car $860 $33,560 3,802%
New House $3,900 $305,372 7,730%
Average Rent $27 $1,231 4,459%
Tuition to Harvard University $420/year $43,938 10,361%
Gasoline $.10/gallon $2.25/gallon 2,150%


Now that we’ve established the fact that prices have risen much faster than even the average income let’s look at additional factors, like worker productivity.

Advancement in technology, improved schools, and new management techniques have helped push worker productivity to impressive heights. According to the Economic Policy Institute, worker productivity grew 73.4% between 1973 and 2015, while hourly pay rose only 11.1%. Companies have enjoyed massive increases in the productive capabilities of their workers and improved profitability, however the average worker wage has stagnated since about 19733

Where has all that extra production gone? Increased profitability drove a massive consolidation of businesses, skyrocketing executive salaries, and the development of automation technologies.

Tufts University released a report stating: “The assets owned by the world’s 50 largest firms increased by 686% between 1983 and 2001.” This consolidation along with deregulation in anti-trust law has led to the explosion in growth of massive multinational corporations2.

Along the way, CEOs have made out pretty well. Information collected by the Economic Policy Institute track the CEO-to-worker compensation ratio. In 1965, CEOs made an average of $819,000/year, while the average private-sector worker brought home about $39,500. The average CEO made an average of 20x more than the average worker4.

In 2013, the average CEO made 295x what the average worker made. While wages for workers increased from $39,500 to $52,100, a bump of almost 32%. CEO compensation jumped 1,752%.

epi-ceo-wage

Finally, a 2016 article from Fortune points to automation as the cause for the loss of 5 million factory jobs in the U.S. since 2000. Indeed, during the same period 5 million people lost their factory jobs, output from U.S. factories rose by about 2.2% per year, or about 17.6% from 2006-20136. This is important to consider when looking at the workforce as a whole. As workers are replaced with machines and software they need to be retrained so they can continue to work.

Conclusion

The working class is grossly underpaid in comparison with the profitability of the businesses they are working for, while executive staff are grossly overpaid. This has led to a dramatic gap in the distribution of wealth and placed undue stress on low income workers and their families. The primary beneficiary of this trend are large businesses, leading to rapid consolidation and the growth of multinational corporations.  The taxpayer subsidizes the pay of underpaid workers of large corporations. There is no cure-all for this troubling direction for American workers, but we should start with stabilizing the livable wage for all workers and encourage development in areas that are lacking employment. Here are a few ideas on how we might do so:

  1. A nationwide minimum wage of $15/hour indexed to local market conditions by consumer price index and economic output.
  2. Cap executive compensation (base pay, bonuses, stock options, etc) at 100x the lowest paid worker. Tax any earnings above the cap at 75% before applying federal tax bracket obligations.
  3. Implement an Automation Tax for companies that have eliminated human jobs or rely on machines for a disproportionately high amount of production or service.
  4. Implement a Livable Wage Tax for corporations that have workers who must rely on government welfare services.
  5. Using taxes collected from the Automation, Livable Wage, and Executive Compensation Cap, offer tax incentives to companies to open new facilities in economically impoverished areas and provide grants to small business owners to expand existing operations in economically impoverished areas.

References

1 Grossman. Fair Labor Standards Act of 1938: Maximum Struggle for a Minimum Wage.

2 Roach. 2007. Corporate Power in a Global Economy. Global Development And Environment Institute, Tufts University.

3 Economic Policy Institute. August 2016. The Productivity-Pay Gap.

4 Davis, Mishel. 2014. CEO Pay Continues to Rise as Typical Workers Are Paid Less. Economic Policy Institute.

5 Mishel, Davis. 2015. Top CEOs Make 300 Times More than Typical Workers. Economic Policy Institute.

6 Lehmacher. 2016. Don’t Blame China For Taking U.S. Jobs. Fortune.

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