Data Explain Why the US Is Experiencing A Generational Minimum Wage Reset

The current talk about inflation and rising wages ignores a simple fact: the federal minimum wage has remained stagnant in inflation-adjusted terms since 1949. That's not just generational stasis, it's multi-generational. 

Rather than modest increases over 70+ years, wages are now catching up to prices in a very short period of time. The impact is exacerbated by factors related to politics and the pandemic: Covid deaths, more stringent immigration policies, early retirements, lack of affordable child care - and even people taking a shot at starting their own business to improve their financial position. That is why, from an socio-economic perspective, there is such a significant impact now, all at once. JL 

Barry Ritholtz reports in The Big Picture:

Real median wages were unchanged from 1979 to 2014; minimum wages were the same in 2015 as they were in 1949. One explanation of what is occurring right now is that those wages are belatedly catching up. This is a “Great Reset.” The most radical difference between now and then is the worker shortage.  The factors driving this include: decreased immigration (2 mm), new business launches (1 mm), lack of child care (1 mm), Covid deaths (500 k), early retirement (1 mm), left labor force (1 mm). Instead of 40 years of modest wage gains and modest inflation, the economy is experiencing that all at once.

I kinda buried the lede last week in my Structural or Transitory? post; we looked at a few inflation elements, including Supply Chains, Goods vs. Services, Semiconductors & Autos, Energy, that all are fairly well understood.

Then there was the wage portion of our discussion. In case it snuck by unnoticed, let me share the money shot with you:

“Real Median Wages were unchanged from 1979 to 2014; Real Minimum wages were the same in 2015 as they were in 1949.”

This is astonishing; it puts into stark context how the bottom wage quartile has lagged for decades; (no real gains for mope than half a century? No wonder so many people are angry). One possible, simple explanation of what is occurring right now is that those wages are belatedly catching up.

Said differently, we are experiencing a generational reset of the minimum wage across most of the United States.

This is a “Great Reset.” In many ways, the economy is running parallel to another reset in the U.S. economy – the period that followed World War Two. There are many parallels but the most radical difference between now and then is the worker shortage.  The factors driving this include:

– Decreased immigration (2m)
– New Business launches (1m)
– Lack of Child Care (1m)
– Covid Deaths (500k)
– Early retirement (1m)
– Not in Labor Force (1M)

But those spitballed numbers only get us part way to explaining those 10 million job openings. What I suspect is occurring is simply a massive unwind of wages that were way too low for way too long at the bottom of the pay scale.

The current environment of rising bottom quartile salaries and worker shortages suggests the labor market has mispriced wages relative to consumer demand. Given the high Quits Rates and New Business Formations, I have tried to explain something else was going on — more than a mere re-pricing, a much broader adjustment is taking place.¹

Artificially suppressed minimum wages occurred in part due to the successful lobbying effort of the fast food and low end retail industries. They helped contribute to decades of entry levels jobs being a deflationary factor. The boomerang we see today is a massive reset, as the market struggles to find a new equilibrium.

Instead of 40 years of modest wage gains and modest inflation, the economy is experiencing that unwind (almost) all at once.