So, President Obama wants to tackle inequality in America by raising the minimum wage to $10.10 an hour. It’s an interesting gesture … one employed many times in the last century in the fight between labor and those with the capital to employ labor.
Alas, it will not end the way low-wage workers hope.
It never does.
Instead, it will spur an inflationary surge in America over the next two years. That will undermine the very workers a wage increase purportedly helps, yet provide a highly profitable investment opportunity to those who realize what’s coming.
A report from the non-partisan Congressional Budget Office (CBO) caused a kerfuffle last week because it projected that raising the minimum wage to $10.10 would reduce employment by between nearly zero and as much as 1 million jobs. The CBO split the difference and claimed President Obama’s minimum-wage desires would kill 500,000 jobs in America – the news nugget that the media clamped onto.
You don’t have to be a Nobel Laureate in economics to know that a wage increase will kill some number of jobs. The calculus is plainly obvious: Higher wages increase an employer’s cost, and some of those employers will forgo the cost and seek productivity enhancements from existing workers – particularly among small businesses that are the cornerstone. At the very least, we will likely see businesses increasingly hiring illegal immigrants who will work off the books for lower wages.
But let’s put all that aside … because [inlinetweet prefix=”” tweeter=”@SovereignInvest” suffix=”#Government”]the real story of a minimum-wage hike won’t be written until two years from now[/inlinetweet] – when our cost of living will be much higher.
I have long made the logical argument that raising the minimum wage would likely push up the inflation rate. The link is pretty simple: 16.5 million Americans will earn as much as $12 billion more every year, based on the wage hike Mr. Obama is talking about. But where does that $12 billion go?
Does it go into the stock market? Low-wage workers have more-pressing needs for their cash. So, no.
Does it go into a savings account? Well, the bottom 40% of America, where a minimum-wage increase has the biggest impact, saves between 0.09% and 0.14% of their incomes. So, that’s a “no” too.
Obviously, the money goes directly into spending – and, for the most part, discretionary spending. That means more money chasing basically the same amount of goods … the fuel for inflation.
But this has always been just an assumption on my part, based on the logical and obvious economic interactions between a consumer’s increasing personal money supply and how that money migrates through the marketplace.
So, I put some math to my assumption to see how it tracked …
History Shows Wage Hikes = Higher Inflation
I pulled every minimum-wage increase in America back to 1938, the year the first minimum wage was instituted, then cross-referenced those wage hikes with the monthly change in the inflation rate over the next one and two years following the initial wage hike … as well as what inflation looked like in the year prior to the wage hike.
The results are quite interesting. They show that, contrary to the puffery I hear from lots of economists today, inflation does, in fact, correlate with minimum-wage increases – especially when wage hikes are large and occur after a long stretch of stagnant wages.
The $10.10 that Mr. Obama and the labor sycophants in the Democratic Party are proposing – a 39% jump from current levels – would be the second-largest minimum-wage increase in U.S. history. And it would come more than five years after the last wage hike. Over the last 76 years of minimum-wage increases, parameters of that sort have led to inflation that runs at a hotter pace one and two years out than it ran the year before the wage hike took effect.
On an average basis, inflation in the first 12 months following an initial minimum-wage increase was 1.3 percentage points higher than it was the 12 months prior to the wage hike. After two years, inflation was 2.5 percentage points higher. In some instances, inflation was up by as little as 1.4% within the first year … and by as much as 11.2% in the second year. And when I look at just the years in which the minimum wage rose more than 20% – as is the case this time around – the inflation rate spiked sharply by the second year.
No matter how I slice the data, though, the one- and two-year inflation rates topped the rate in the year prior to the wage increase in nearly every instance, which implies that some correlation clearly exists between the two – that, on some level, minimum-wage increases are a leading indicator of unexpectedly higher inflation in the offing.
To be sure, numerous factors weigh on the economy and inflation: wars, recessions, consumer and business sentiment, currency crises. Ignorant politicians. Federal Reserve policies. Even the policies of foreign central banks that push and pull at currency exchange rates. And there were several instances in which the government revised its methodology for calculating the inflation rate.
Then again, those same factors and others also play on the economy when the minimum wage remains unchanged.
Because it’s impossible to account for every potential factor in every year, the best you can do is look at two plot points and see how they correlate to one another – and then think: Does this make sense?
To me, the data makes perfect sense, because the connection is so obvious – more money chasing consumer goods leads to inflation. I’m not implying that minimum-wage increases are the cause of inflation, only that they’re an important, contributing factor and that they point to what is coming in the economy months before government data see it.
Inflation of as Much as 7.5% is Coming
I’ve come to the conclusion that if the minimum-wage in America shoots up to $10.10 an hour, we will see reported inflation of 2.7% to 3.2% 12 months later … and within 24 months inflation will approach 4.5%.
Again, that’s average. I could make a case that by year two we’ll see an inflation rate north of 6%, possibly as high as 7.5%.
Either way, raising the minimum wage will have a noticeable and possibly dramatic impact on inflation in America – which will, ironically, negate some or all of the benefits of a wage increase for the lower-income earners Mr. Obama and the Dems thinks they’re helping. Their fatter paychecks will simply go to affording goods that suddenly carry a fatter price tag, leaving them in the same circumstance they are today.
So, as the talk of a minimum-wage increase heats up in coming months, you now know there is unquestionably an inflation impact on your life, maybe not immediately, but certainly over the next two years.
And that means we will ultimately need to change our investment strategy over time, because while inflation is bad news from some industries, it is good news for others … and inside the monthly Sovereign Investor, we’ll be looking to take advantage of that changing landscape before others figure out that wage-induced inflation is on the way.
Until next time, stay Sovereign …
Jeff D. Opdyke
Editor, Profit Seeker
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