The federal minimum wage, unlike social security and and many tax code provisions, is not adjusted with inflation every year. However, several states including Florida, adopted this practice of adjusting the minimum wage with increases in the consumer price index in order to stabilize low income earners’ purchasing power. What are the effects of an inflation-indexed minimum wage in regards to employment and is this practice effective in Florida?
There are some justifiable merits to inflation-indexing the minimum wage. It allows minimum wage workers to be able to purchase the same goods throughout the years, despite the increased prices. Planned and relatively small increments of inflation has its advantages for the economy and for employers. Employers can enjoy giving raises or let inflation reduce the value of the wage when workers decrease in productivity. As a rule, moderate inflation is a sign of a healthy economy. The Federal Reserve attempts to keep the economy healthy by targeting inflation at 2%.
Generally, wage cuts have been less frequent, in part due to inflation. Rather than cut wages, employers often maintain a current wage level and wait for inflation to erode its real value. Sebastian Kube, Michel André Maréchal, and Clemens Puppe write about how a wage cut is shown to decrease productivity and morale by 20%. This can be detrimental to the growth of a business. Inflation keeps employers and employees from dealing with the emotional turmoil that comes along with a blunt wage cut. This price adjusting feature that inflation has on wages disappears when an inflation-indexed minimum wage is in play. Instead of the low-skilled worker not getting a raise and having inflation do the wage cut, the company must take in less profits or lay off the worker altogether.
The Downside for Florida
In the United States, only 2% of hourly workers make at or below the minimum wage. In Florida, that rate is 4.5%. Although, the restaurant industry employs the majority of workers that get paid at or below the minimum wage, it is a substantial driver of economic growth in Florida. Three out of the top ten cities with the most fast-food restaurants are in Florida, with Orlando being the most saturated.
Fast-food restaurant franchise owners are substantially impacted by minimum wage laws since they have a large portion of employees at or around the mandated wage. Indexing the minimum wage with inflation makes it very tough to make a profit. A typical fast-food franchise owner makes close to $55,000 annually, working 60-70 hours per week. These owners have to pay large royalty fees to the franchisor and profits are strangled by the ever-increasing labor costs.
Despite the sluggish recovery from the Great Recession, the good news is that in the past six months, Florida has elevated production levels in most sectors, especially in the restaurant industry. For instance, the trade, transportation, and utilities output has risen over 3% and construction has risen 7.8% in the last 12 months. As a result, wages have increased as well. However, the inflation-indexed minimum wage may be hindering the speed of the recovery. Although indexing the minimum wage with inflation may have its merits, there are also some hidden costs that should be taken into consideration, especially in Florida.