Thursday, November 19, 2009

Inflationary Policies

By Marc Korman.

Economists are afraid that the government’s fiscal and monetary policies will lead to an oversupply of money and runaway inflation. But out in Colorado, the opposite is taking place. Projected deflation in 2010 means the state’s minimum wage will actually decline.

Colorado’s Constitution (Article VIII, Section 15) was amended in 2006 to adjust the minimum wage based on the Consumer Price Index (CPI) for Colorado. There actually is no statewide CPI, so the state uses the Denver-Boulder-Greeley urban area CPI. As reported by the New York Times and others, the CPI projection for 2010 will mean a four cent drop in the minimum wage from $7.28/hour to $7.24/hour. However, because the current federal limit is $7.25/hour, the drop will only be three cents. Ten other states tie their minimum wage to inflation, but Colorado is the first to face the possibility of a declining minimum wage.

In Maryland, the minimum wage was last increased in 2006 to $6.15/hour, overriding Governor Ehrlich’s veto (MD. Ann. Code Labor and Employment § 3-413). The dollar increase was made moot the next year when Congress, in one of the Democrats’ first victories after winning the majority, passed a federal increase. For the first time since 1997, the federal minimum wage was increased. In stages over three years, the wage went up to $7.25/hour.

Tying government policies to inflation is generally a good idea. Congress’ failure to tie the Alternative Minimum Tax brackets to inflation has led to annual scrambling to pay for a fix so more and more middle class taxpayers are not swept into the alternative system. Governor O’Malley was right to propose linking the gas tax to the construction cost index back in 2007 and his failure to continue advocating that policy has been a mistake. I have proposed connecting public university tuition to inflation to keep the schools funded and affordable, though the policy should be coupled with increases in financial assistance.

The minimum wage offers another policy that can be linked to inflation. Starting at $7.25/hour, Maryland should increase its minimum wage with an appropriate CPI for the state or region. However, one caveat should be that the minimum wage cannot decline. Based on further study, the state might also consider a ceiling to annual increases due to inflation.

Economists have argued back and forth over whether the minimum wage is good or bad for the economy and job growth. Indeed, I have no doubt that some will point to the 2006 and 2007 state and federal minimum wage increases and blame the economic collapse on them. I cannot settle the debate here, though I believe beneficial effects of having a minimum wage have been well documented since the 1930s. Further, I believe that the few cents increase that will occur with inflation will be absorbed by most companies and not lead to mass layoffs or large curtailments in future hires.

Legislators in the General Assembly should consider linking the minimum wage to inflation. It is good for Maryland’s workers, especially those most vulnerable, and has the benefit of not affecting the state budget.