By Bre Payton | Watchdog.org
If San Diego’s proposed minimum-wage hike is passed, employers won’t be able to predict the increase from year to year.
PROBLEM: San Diego shouldn’t base their minimum wage increase around inflation, an economist says.
The proposal would set wages at a cool $11.50 an hour by 2017. Then beginning in 2019, the minimum wage would increase annually based on the inflation rate in the previous year.
The rate of inflation would be determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers, which looks at the changes in costs of goods from year to year.
Watchdog.org spoke with James Sherk, a senior policy analyst for labor economics for the Heritage Foundation about San Diego’s proposal.
Bottom line, Sherk said that tying minimum wage increases to the CPI would be like setting it on a dysfunctional kind of autopilot.
1. The CPI isn’t accurate.
Because it doesn’t adapt quickly and accurately enough to changes in the market (like new products, changes in quality of consumer behavior), the index is artificially inflating the inflation rate — by a rate of 1 percent each year.
But the CPI won’t get changed anytime soon as both the tax brackets and the Social Security costs are adjusted according to the way the CPI is being calculated, Sherk said.
“To adjust that is highly controversial with both parties,” he said.
2. The economy isn’t ready.
The rate of inflation right now is the lowest since the recession. But it’s the same rate it was in August 2003, which was feeling the aftershocks of the 2001 recession and spike in inflation, he said.
Chris Duggan of The California Restaurant Association wrote a letter to San Diego City Council President Todd Gloria that adjusting the rate according to the index would be “disastrous,” the Voice of San Diego reported.
“By tying increases in the minimum wage to a single economic factor (inflation) and ignoring other factors such as the strength of the job market, indexing will inevitably result in increases in the minimum wage at times when the local economy is ill suited to absorb new cost pressures,” Duggan wrote.
3. It doesn’t accurately reflect what’s going on in the economy.
The economy fluctuates, and the CPI can’t predict that, Sherk said.
An example would be Florida’s decision to index the minimum wage just before the 2008 Great Recession hit.
In 2007, Florida minimum wage requirements began to adjust according to the inflation rate as determined by the CPI after voters approved a 2004 ballot initiative.
At that time states didn’t see the housing bubble coming, and they suffered some of the worst effects from the housing market crash. If they knew that was coming they probably wouldn’t have pushed the automatic increase, Sherk said.
“Putting it (minimum wage on) auto pilot isn’t good because it doesn’t reflect what’s going on with the economy. But if you are going to set to to autopilot, then use an accurate measure of inflation,” Sherk said.
He recommended using the Personal Consumption Expenditures Price Index, which both the Congressional Budget Office and the Federal Reserve use.
The PCE takes out volatile goods like fuel and food while accounting for inflation, while the CPI leaves them in.
Contact Bre Payton at firstname.lastname@example.org, or follow her on Twitter @bre_payton.