Inflation, minimum wages, and profits: Protecting low-wage workers from inflation means raising the minimum wage
There are two main debates about what to do about inflation. One is mostly good-faith (if highly contested): It concerns the actions of the Federal Reserve. Another is mostly bad-faith: It uses the existence of elevated inflation as a cudgel against any progressive policy change and as a justification for long-standing ideological priorities. This is most visible in fiscal policy debates, with some people claiming simultaneously that spending must be restrained (a contractionary move in fiscal policy), but taxes must be cut (an expansionary move).
This bad-faith will certainly rear its head in debates on attempts to move forward on stronger labor standards as well—say by increasing the federal minimum wage. Even under normal circumstances, opponents of minimum wage increases claim that they will be inflationary, so they will almost certainly exaggerate these effects today. In this blog post, I make the following points about the relationship between minimum wages and inflation:
- Faster inflation makes it more important, not less, to raise the federal minimum wage. Every year lawmakers don’t raise the minimum wage is a year that they have effectively cut the purchasing power and living standards of this country’s lowest wage workers.
- Even under a worst-case inflation scenario where every penny in extra pay that results from moving the federal minimum wage to $15 by 2027 is passed on in the form of higher prices, the result would be a five-year stretch of inflationary pressure equal to 0.1% per year (or about 1/100th of the increase we’ve seen since 2021), then the inflationary effect would return to zero.
- Even this extremely mild inflation could be substantially blunted by other margins of adjustment to a higher minimum wage—including a retreat from today’s still sky-high profit margins. During normal times, profits account for about 13% of the price of goods and services, but since recovery from the COVID-19 recession began in the second quarter of 2020, rising profit margins have accounted for roughly 40% of the rise in prices. When these margins normalize, there will be ample room for noninflationary wage growth.
Poverty is a policy choice: State-level data show pandemic safety net programs prevented a rise in poverty in every state
The year 2021 proved to be a remarkable showcase of the power of public policies in alleviating economic hardship. This week, the Census Bureau released data from the 2021 Current Population Survey Annual Social and Economic Supplements (CPS ASEC) detailing poverty and other economic conditions across the country. The data revealed that social insurance programs—like Social Security, economic stimulus checks, a strengthened unemployment insurance (UI) system, and the expanded Child Tax Credit—kept more than 25 million people out of poverty. State lawmakers should do everything in their power to revive these programs.
Differences in the supplemental and official poverty measures highlight the impact of pandemic support programs
In 2011, the Census Bureau began annually releasing an additional poverty measure called the Supplemental Poverty Measure (SPM). Although imperfect, the SPM is a much better measure of poverty than the official poverty rate. SPM accounts for major government benefits like Social Security and child tax credits, and uses a more holistic measurement of modern costs of living and geographical differences in those costs. The latest data show that the 2021 SPM rates are the lowest on record for all years for which SPM estimates are available, starting from 2009. This is even more remarkable considering that the economic hardships and disruptions brought on by the COVID-19 pandemic were still very present during 2021.
Household incomes have fallen since 2019 despite growth in workers’ earnings
On Thursday, the U.S. Census Bureau released 2021 household income and household earnings data for states from the American Community Survey (ACS). National averages hide the wide disparities experienced by workers and families across states while state-level data can help us understand how policy choices impact income and earnings. According to the ACS, inflation-adjusted median household income in 2021 was $69,717 nationally with large differences across states. Nineteen states and the District of Columbia had median household incomes above the national average with the highest being Maryland ($90,203), The District of Columbia ($90,088), and Massachusetts ($89,645). However, 31 states had median household incomes below the national median with the lowest being in Mississippi ($48,716), West Virginia ($51,248), and Louisiana ($52,087).
The labor market recovery and pandemic relief measures lifted Black and Brown workers and families in 2021
The 2021 Census Bureau reports on income and poverty provide a first official glimpse at the economic condition of U.S. households by race and ethnicity in the first full year of the COVID-19 economic recovery, which reached people of color much faster than the recovery from the Great Recession.
The faster pace of this recovery can be attributed to the strong pandemic policy response that not only contributed to robust job growth throughout 2021, but also provided critical income supports to economically vulnerable families and children.
However, along with these positive outcomes came a spike in inflation that threatened to chip away at any income gains. As a result, in 2021, real median household income ($70,784) was not statistically different from 2020 ($71,186). Real median household income was also statistically unchanged across all racial and ethnic groups. Reported income estimates reflect the Census Bureau’s inflation adjustment for 2021 – an annual increase of 4.7% between 2020 and 2021 and the largest annual increase since 1990. While this suggests that median incomes essentially kept pace with the 2021 rise in prices, these estimates do not reflect the more rapid increase in inflation in 2022.
Census data show health insurance coverage gains for Black workers and children in 2021, but we can go further with better policy
The number of workers with health insurance coverage grew between 2020 and 2021 as the economy recovered from the massive job losses associated with the coronavirus pandemic. Most people (91.7%) had health insurance coverage at some point during the year and the share of uninsured people fell from 8.6% in 2020 to 8.3% in 2021.
Notably, the share of Black people who were uninsured fell from 10.4% in 2020 to 9.0% in 2021, marking a rare occurrence in which the Black uninsured rate fell below double digits.
In 2021, most people (54.3%) had health insurance through an employer (either their own employer or a family member). The share of people with private health insurance of any kind (employment-based or through individual purchase) fell slightly to 66.0%, while the share of those with a public plan rose to 35.7% (note that coverage types are not mutually exclusive – one person can have two types of health insurance coverage).
Pandemic safety net programs kept millions out of poverty in 2021, new Census data show
It should not have taken a pandemic to realize poverty is a public policy choice.
Public investments in safety net programs continue to be extremely effective poverty reduction tools, as newly released Census income data show. Government social programs kept tens of millions of people out of poverty in 2021. Because of expansions to programs like unemployment insurance benefits and the Child Tax Credit, poverty rates were actually lower in 2021 than they were prior to the COVID-19 pandemic.
The poverty reduction achieved through expanded social insurance programs highlights how much policymakers’ choices can impact poverty.
Unfortunately, some of the program expansions enacted in the pandemic have already been reversed, and cuts to programs like unemployment benefits and the Child Tax Credit will increase household economic distress going forward.
The 2021 Census report highlights how government relief measures played a vital role in reducing poverty
Below, EPI senior economist Elise Gould offers her initial insights on the Census Bureau’s latest data on earnings, incomes, poverty, and health insurance for 2021. Read the full Twitter thread here and follow along for more to come.
The federal government played a vital role in reducing poverty in 2021. While Social Security remains the largest poverty reducer in the U.S.—reducing the number who would have been in poverty in 2021 by 26.3 million—the relief measures in 2021 were vital. pic.twitter.com/zYDwW87lIT
— Elise Gould (@eliselgould) September 13, 2022
Even with the rise in inflation, the bounce back in the labor market and strong safety net programs such as the child tax credit meant a reduction in poverty between 2020 and 2021. Remember SPM poverty includes those safety net programs while the Official Pov Measure does not. pic.twitter.com/4TA7YVekbs
— Elise Gould (@eliselgould) September 13, 2022
Today, the Census Bureau also released valuable statistics on earnings for men and women in 2021. A bit surprising to me that there was little change in the overall number of workers, but a notable increase in full-time, year-round workers in 2021, for both men and women. pic.twitter.com/iep9KUELX7
— Elise Gould (@eliselgould) September 13, 2022
Median earnings for all workers (regardless of work hours) rose between 2020 and 2021 by 4.6%, in part because of the shift from part-time to full-time work. The 4.5% rise in women’s earnings was particularly good news given that theirs is still significantly lower than men’s . pic.twitter.com/WIrGOBAmej
— Elise Gould (@eliselgould) September 13, 2022
August CPI data will likely show a second straight month of overall price declines: New interest rate hikes may be harmful
Below, EPI director of research Josh Bivens offers his predictions for tomorrow’s release of the consumer price index (CPI) for August. Read the full Twitter thread here.
The price decline will be driven overwhelmingly by commodity price softening. But even core inflation (excluding food and energy) fell in the PCE index last month to its lowest level since 2020. 2/
— Josh Bivens (@joshbivens_DC) September 12, 2022
What should policymakers if they get another month of breathing room on inflation? Many people will be persuaded by a view that the responsible thing to do here is maintain the fight to cram price pressure down as far as possible. 4/
— Josh Bivens (@joshbivens_DC) September 12, 2022
But, the “maintain pressure” view is only responsible if one thinks measurably-greater economic slack (higher unemployment, for example) is needed to pull inflation back down to more-normal levels (say around 2-3%) in a reasonable time-span. 6/
— Josh Bivens (@joshbivens_DC) September 12, 2022
Goods prices are set to post outright falls going forward. Supply chain pressure seems to unwinding – even in the face of China’s continued Zero Covid approach. The normalization of pre-pandemic spending patterns (more services and less goods) is continuing. 8/
— Josh Bivens (@joshbivens_DC) September 12, 2022
In the labor market, over the past 6 months, average hourly earnings are growing at a 4.8% annualized pace, down a full percentage point from January – a pronounced fall even with low unemployment. 10/
— Josh Bivens (@joshbivens_DC) September 12, 2022
About those profits – while the most recent quarter saw a huge increase in the contribution of profits to price growth, this was almost surely mostly in the energy sector. 12/
— Josh Bivens (@joshbivens_DC) September 12, 2022
What all this tells us is that something close to the current state of economic slack is consistent with moderating price pressures – even outside of food and energy. 14/
— Josh Bivens (@joshbivens_DC) September 12, 2022
For example, real final sales to domestic purchasers (domestic demand) grew by just 1.2% between 2021q2 and 2022q2. That’s a growth rate that should have substantially “cooled” the economy by any measure. 16/https://t.co/IBH0CQv4qe
— Josh Bivens (@joshbivens_DC) September 12, 2022
A month of flat prices would mean that the inflationary outlook has meaningfully changed. So, policy should change too. Hiking by 0.75 in the face of flat monthly prices tilts risks too-sharply in the direction of recession, and isn’t needed to keep tamping down inflation. end/
— Josh Bivens (@joshbivens_DC) September 12, 2022
2021 Census Data Preview: A growing economy and government relief measures matter for earnings, incomes, and poverty
The vast majority of families and households in the United States rely on a combination of labor earnings from work and public assistance to make ends meet, especially throughout the pandemic recession and recovery.
Next week, the Census Bureau will release their latest data on earnings, incomes, poverty, and health insurance for 2021, which will inform our understanding of people’s economic wellbeing last year. Below, I provide context for the data next week by looking at how an expanding economy—the robust bounce-back in the labor market— and vital public programs sustained workers and their families in 2021.
These two phenomena are related, as public policy directly led to the robust recovery we experienced in the wake of the pandemic recession. Public policy further helped workers and their families stay afloat with expanded and enhanced unemployment insurance, economic impact payments, and child tax credits, to name a few.
California is on the brink of enacting the first significant law to combat international labor recruitment abuses and protect 300,000 temporary migrant workers. Will Governor Newsom sign the bill?
Key takeaways:
- There are at least 310,500 migrant workers in California—employed through temporary work visa programs—making it the largest host state. These temporary migrant workers are vulnerable to abuses of labor recruiters that connect workers to jobs in the United States.
- The abuses of labor recruiters have included requiring the payment of illegal fees to obtain jobs which can result in debt bondage, as well as cases of wage theft, discrimination, human trafficking, and other abuses. But since these U.S. work arrangements are being set up abroad, it is difficult to regulate the behavior of recruiters.
- Congress has failed to act to protect workers who are recruited abroad through temporary work visa programs. A California law was enacted in 2014 to fill this gap. Senate Bill (SB) 477 created a registration system for labor recruiters, providing transparency and tools to hold recruiters accountable for abuses. However, that law has been interpreted to apply only to the H-2B visa program, one of the many visa programs that are used to hire workers in California. H-2B workers only account for a small share of the state’s temporary migrant workers, less than 1%.
- Assembly Bill (AB) 364, which passed the California Assembly and Senate, would expand the reach of SB 477 to nearly all temporary work visa programs, thus protecting an estimated 300,000 migrant workers. It would also give California the authority to monitor and regulate labor recruiters doing business in the state and more proactively prevent labor abuses and trafficking.
- California is on the brink of passing the first significant reform of the international labor recruitment process. But will Governor Newsom sign AB 364? He must decide whether to sign it by September 30, and immigrant and worker advocates are calling on him to do so.