By Andrew R. Graham
With the call for a higher minimum wage now on the national stage, it is time to consider how it should be set. It is clear that the current national standard of $7.25 an hour is very low in comparison to past practice.
Gadfly Michael Moore points out that Henry Ford paid his workers $5 a day in his new factory. He notes that in today’s dollars that would be around $116 a day or nearly $15 an hour, an amount close to where the $7.25 rate would be if adjusted for inflation. Moore thinks that a $15 minimum wage is therefore justified.
For many, however, the thought of a $15 an hour minimum wage causes some severe sticker shock, and as such it probably has little political traction. But even the president’s proposed rate of $10.10 seems arbitrary. On what is it based? There is justifiable employer and employee apprehension over what might come next.
Many have argued that once reset, the minimum wage should be adjusted each year for inflation. But again, the volatility of the Consumer Price Index and its disconnect from wage rates raises even more concern, and why index an arbitrary number?
An alternative might be to tie the minimum wage in some meaningful way to the marketplace and actual compensation practices.
Data on wages is available from the Bureau of Labor Statistics National Compensation Survey, but there is another source that is easily available to anyone with a computer. It is the Social Security Administration’s National Average Wage Index (www.ssa.gov/oact/AWI.htr).
It is elegantly simple, being the total value of all W-2 wage reports filed with the IRS for the year, divided by the number of W-2 statements. The index is updated every year in October and has been published for more than 60 years. It is used by the Social Security Administration to index wages when calculating retirement benefits.
Instead of a year-to-year adjustment, as is typically done using the Consumer Price Index, volatility can be dampened and predictability enhanced by using a rolling average over a period of, say, five years. So, if we average the AWI amounts for the five years ending Dec. 31, 2012, we get a value of $42,128.94. If we take one half of that amount and divide it by 2080 to express it as an hourly rate, the result that could have been effective for calendar 2014 is $10.15! To calculate the 2015 rate, drop the 2008 value and add 2013 when it is available, and so on.
This is a system for which the data is easily available and beyond reproach. It would allow the minimum wage to be put on autopilot in a manner that is fair, predictable and well within the range of many proposals now being considered. Why not use it?
Andrew R. Graham is a retired pension plan consultant and a certified employee benefit specialist.