American Exceptionalism And Minimum Wage

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Includes: DIA, IWM, MCD, QQQ, SPY
by: Andrew Sachais

Summary

The debate about the appropriate level of minimum wage in the U.S. is heating up.

The wage figures being debated, however, seem arbitrarily contrived.

By employing some sort of benchmark that links wages to the economy's health, all parties could benefit.

As tax season approaches, minimum wage workers are out again advocating en masse for livable wages. Many advocacy groups have stated the proper minimum wage for all U.S. employees is $15 an hour, double the current rate. While a livable wage is certainly a right that all citizens should be afforded in developed countries, the figures being presented in the media seem arbitrary.

In finance, products are always linked to some sort of benchmark. Whether that benchmark be CPI, LIBOR, the S&P 500, or something else, there is always some logic to why something is priced the way it is. The first step in solving this problem is looking at the validity of minimum wage workers' claims.

Below is a chart of the U.S. minimum wage in current (the December 2014) dollar terms. From an inflation-adjusted perspective, minimum wage is well below where it has been in the past. During the 1960s, it ranged between $8 and as much as $10.60 an hour. When inflation ran rampant in the 1970s, however, advances in minimum wage were slow to keep up, detracting from its purchasing power. Minimum wage has been raised in recent years, but doesn't buy as much as it once did.

Data provided by the Federal Reserve

Looking at minimum wage compared to the inflation measure, however, shows more parity. The two measures were relatively equal from the inception of minimum wage till about 1980. From 1980 through the mid-2000s, minimum wage lagged rising price pressures, eating away at purchasing power. While the gap between inflation and minimum wage has closed in recent years, workers are still stating that the current wage is too low to live off of.

Since the financial crisis and subsequent rebound of the U.S. stock market, more light has been shone on the low minimum wage rate. In 2013, reports came out that McDonald's (NYSE:MCD) had a support line, known as the "McResource line," in place for workers to receive government support, while also offering up a planned budget to live off of if the employee was making minimum wage. The only problem with the budget was that it didn't account for gas or food expenses, and assumed the worker would also being earning a second income.

"News of the McResource line comes a week after a report found that more than half of fast food workers have to rely on public assistance programs since their wages aren't enough to support them.

The report estimated that this public aid carries a $7 billion price tag for taxpayers each year. A separate report by the National Employment Law Project released on the same day showed that McDonald's alone was responsible for $1.2 billion of that $7 billion.

Earlier this year, McDonald's came under fire for releasing a budget planning guide for its employees. The sample budget it provided didn't account for either food or gasoline, a big expense for low income workers. The budget also left room for an income from a second job, which many called an admission by the fast food giant that its workers can't live on wages from one job at McDonald's," according to CNN Money.

While groups like "Low Pay is Not OK," an advocacy group for low-paid workers who released a recording of a McDonald's employee on the phone with the hotline, are asking for a broad raise to $15 an hour, this number still seems slightly arbitrary and requires a range of hypothetical situations to find a more suitable benchmark.

Data provided by the Federal Reserve

The minimum wage figure will be seen in the chart on an hourly basis. Taking it a step further, however, annual salaries will be calculated for part-time and full-time employees. A part-time employee works as much as 20 hours a week, while full-time employees work as much as 35 hours a week, according to McDonald's corporate website.

The first benchmark is tying minimum wage to pre-tax corporate profits. This aligns wages with corporate revenue earned, allowing for wages to mirror what the companies that employ them are making. Being tied to this index, wages would rise during boom times and fall during recessions, potentially limiting job cuts, and aligning employee interests with the company they work for.

Much has been made about the outsized gains of corporate executives relative to the average employee, but aligning the interests of both executives and employees for the betterment of the overall company could benefit productivity as well.

Looking at the chart, minimum wage would have risen in nominal terms from $5 to $15 during the span of 1980 to the year 2000. Moreover, during recessions, wages would have taken a significant cut, but could ultimately have resulted in employees keeping their jobs and living more frugally than having to apply for unemployment. An issue with benchmarking to profits is that minimum wage would currently earn part-time employees close to $42,000 a year, while full-time employees could make as much as $74,000. While corporate profits are at record highs, this level of employee expense would weigh greatly on profitability, making it not very feasible.

Data provided by the Federal Reserve

A similar indicator would be to tie minimum wage to a broad stock market measure, such as the S&P 500. Corporate executives' net worth closely tracks the movement of the companies that employ them, due to stock compensation awarded.

Tracking minimum wage to the stock market, however, could limit the divide between equityholders, and the employees that make up such companies. Going off of this logic, part-time employees would have seen wages rise to as high as $24,000 a year during the tech bubble in early 2000, while full-time workers could have made as much as $42,000. This was great during the boom time, but wages would have then fallen as much as 40% when the bubble burst.

Tying wages to the stock market allows for wages to fall during recession, something that was not experienced during the 2009 financial crisis, ultimately pushing unemployment rates up drastically. By offsetting "nominal-wage rigidity," or the inability to cut wages during recession, employment could remain more stable, and government spending wouldn't have to be as vast.

Data provided by the Federal Reserve

The final hypothetical benchmark to provide a livable minimum wage for employees is tying the wage measure to overall productivity. This one seems the most logical, and allows workers to earn what they put in (in an aggregated form, that is). Productivity and minimum wage began to deviate from each other in the 1970s, allowing increased productivity to mainly benefit corporations and equityholders, while alienating the laborers.

By current standards, minimum wage would be around $29 an hour, translating into $28,000 a year for part-time employees and up to $48,000 for full-time. By allowing worker input and output to match once again, it could spur increased productivity measures, thus pushing earnings even higher.

The point of this article was not to spew "socialist propaganda," but to add some level of logic to the debate surrounding minimum wage. Currently, policymakers see minimum wage tracking inflation as being enough, while keeping corporate bottom lines healthy, but laborers are unable to afford normal living conditions, creating a social divide.

This externality is not healthy for the general welfare of society, and ultimately detracts from "American Exceptionalism." When workers begin to feel like the labor they are doing actually matters, in wage terms, if not in the substance of the work itself, productivity will rise and protests will cease. Moreover, the responsibility of employees will shift from the government to the employers they toil for.

The "wealth inequality" debate, as well as discussions about minimum wage will only heat up as the 2016 presidential elections come closer. If Americans want a reasonable solution, aside from the typical bickering, pegging minimum wage to a reasonable benchmark looks like the most logical solution.

Data provided by the Federal Reserve

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.