What a $15 an hour minimum wage accomplishes

Who would have thought that Floridians would take social engineering into their own hands? More than 60 percent of us voted to raise the minimum wage to $15 an hour over time, which could have a far-reaching impact on income distribution in the state and lift some low-wage earners above the poverty level. That new wage will earn around $30,000 a year.

Murad Antia is a finance instructor in the Muma College of Business at USF [ USF ]

The initial increase doesn’t take effect until Sep. 30, 2021, when the minimum wage rises from $8.56 per hour to $10 per hour. The wage will rise by $1 per hour every Sep. 30 until Sep. 30, 2026, when it reaches $15 per hour. The six-year rise amounts to an annualized increase of 9.8 percent, which is significantly higher than the expected annual inflation rate of around 2 to 2.5 percent in the near future. After 2026, the minimum wage will increase every year with inflation, as it does now.

The academic literature is mixed when it comes to the effects of minimum wage increases on employment. Some of the earlier research determined that teenage unemployment increased marginally when it was raised. Some economists predict the increases in wages could lead to higher unemployment especially during an era of job automation when robotics and machine learning are replacing human employment.

Minimum wage workers have complained that their earnings do not amount to a living wage and so many have to rely on government support such as the Supplemental Nutrition Assistance Program (SNAP) and the Earned Income Tax Credit (EITC). Hopefully, raising the minimum wage will reduce their dependence on governmental support and move them towards self-sufficiency.

Many employers have been raising wages of their lowest paid employees to $15 per hour. Amazon did so in 2018. Target followed the next year. In September, Walmart announced it would be shifting some of its $11 hourly earners to $15 or higher. Walmart’s warehouse wages are at $15 and it is giving those workers up to $3 more an hour as a holiday pay boost this season.

The restaurant industry and small independent retailers, already hit by the pandemic, face another challenge. Because they operate on thin margins, restaurants cannot absorb the increase and do nothing. The costs have to be passed off to consumers, which means higher prices for meals. So, will consumers be willing to or afford to pay higher prices? It remains to be seen.

The percentage increase in the minimum wage will be far higher than the inflation rate even if we go way back and use a time span of 30 years — from 1996 to 2026. Assuming an inflation rate of 2 percent annually between now and 2026, the 30-year annual inflation rate amounts to 94 percent which is far lower than the 30-year increase in the minimum wage, which ending 2026 will amount to 216 percent. Using realistic assumptions, Florida’s median nominal income growth between 1996 and 2026 will be around 133 percent. This too will be far less than the increase in the minimum wage.

So, what does the increase in the minimum wage accomplish? A reduction in income inequality and a move toward providing a living wage to the lowest-paid workers. These workers probably do not get employer provided health insurance or retirement benefits but could get government assistance such as income supplementation with the EITC and health insurance assistance with the Affordable Care Act. Life will not move to easy street but will get a bit more comfortable, especially if they have a family to support.