Tuesday, April 7, 2015

Making the Poor Poorer: An Index

The government of British Columbia declared recently that BC would do as most other provinces do: index the minimum wage to the Cost of Living index. No longer will the working poor see their earnings decline in real terms year after year; this way they will finally be able to keep up.

Not so fast.

One problem with this reasoning has been pointed out by many commentators: since BC's minimum wage is far below a living wage, indexing it to the cost of living will guarantee it remains far below a living wage.

What has not been widely recognized is that indexing to cost of living will condemn the working poor not just to staying the same distance back of the average worker, but to falling further and further behind. The reason? Annual changes for the average worker reflect not just price inflation, but also economic growth; in most economies most of the time productivity keeps improving, and--over the medium or the long term--wages and salaries increase by considerably more than do prices. In the United States, for example, GDP per person increased by almost 50% between 1995 and 2013. Such gains deserve to be shared by all workers--including those making the minimum wage.

A much fairer way to index the minimum wage, then, would be to use that yardstick: GDP per person. Very rarely, the minimum wage might go down year-over- year using that approach. But most years it would go up--and go up by more than the cost of living. If we used that index, minimum wage workers would share more equitably both in the occasional economic downturn and in the much more frequent phenomenon of modest economic growth. Using prices as a means to set wages, on the other hand, is a recipe for making the poor slowly but steadily poorer and poorer and poorer in relation to the rich and the middle class.

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