Friday, August 25, 2017

Understanding How Minimum Wage Affects Spending and Debt

Photo by Irina on Unsplash
The federal minimum wage has remained steady since 2009 at a rate of approximately $7.25. State and local laws, however, have ensured that workers from coast-to-coast have been able to meet the constant rise in the standard of living in their areas by raising the minimum wage in order to ensure individual needs can be met. 

Minimum Wage

Yet, organized labor and anti-poverty groups continue to push for ever more regulations at the federal level. Even though the idea remains popular with the general populous, researchers evaluating the benefits of such a move have found clear racial and partisan differences when it comes to support. 

Like throwing a stone into a pond, there is a ripple effect that cannot be ignored. Here are a few facts to keep in mind when deciding whether or not you should support the proposed change in the minimum wage.

Spending and the Minimum Wage

A research project based on a Consumer Expenditure Survey found that following a year when the minimum wage was raised by $1, spending rose, on average, $700 per quarter in homes where minimum wage workers lived. 

The extra money was frequently spent on durable goods especially on new trucks and cars. Unfortunately, such purchases were often financed purchases. When evaluating spending response data, two facts comes to light. 

First, the total spending increase primarily happens during the first quarter after the minimum wage is increased rather than before despite the fact laws are usually passed up to 18 months in advance. 

Secondly, spending remains at that level before beginning a slow decline to pre-hike levels but only after many months. In other words, spending increases more than earnings immediately after a hike.

Debt and the Minimum Wage

The same aforementioned survey found that household debt that included autos, home equity and credit card debt rose during the first year after a minimum wage increase in homes where the total income was below $20,000 per year. 

Those households likely included the most minimum wage workers. It was also discovered that in higher-income households, the same did not hold true. In fact, there was very little change when it came to spending that resulted in debt. 

Just as with spending declining months after a wage hike has been instituted, so does debt. In fact, by the end of the second year it declines significantly. What the pattern proves is that much of the early consumption response is, in fact, debt-financed spending.

Aggregate Spending and the Sunshine Act

Although the research study mentioned above provided valuable insight into consumer spending-debt response to minimum wage increases, it was limited to subject reports by survey which are limited and, depending on the subject, sometimes even suspect. 

In response, legislation has been proposed in the form of the Aggregate Spending and the Sunshine Act which would require individual business domains to report transactions related to research and development, medical affairs, manufacturing, consumer spending and other types of transactions that must be taken into consideration when evaluating the true impact of raising the minimum wage.

In order for the government to make an informed decision on the issue of whether or not to raise the minimum wage, a robust master customer data file is required. Although the Consumer Expenditure Survey has been insightful, it is lacking. 

It is anticipated that it will take the collection of huge amounts of transactional data to determine the true impact of wage changes. It will become the linchpin in new compliance reporting designed to bring greater transparency to financial transactions and ensure that minimum wage workers are not left behind.

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