Minimum Wage Reform

The reforms propose that minimum wage is indexed to the GDP per hour or income per hour, rather than the CPI (prices), in order so that workers receive the same share of revenue per hour over time, and their pay is not devalued by inflation. Prices do not increase at the same rate as GDP per hour due to increases in efficiency and the decrease in prices in real terms. Minimum wage will be adjusted in each state based on how much companies are earning per hour locally. This can be based on differences in GDP per hour or prices by state.

Table A: Historical Levels of Federal Minimum Wage

This table records the historical levels of the federal minimum wage, and compares them to various measures including the GDP per hour and CPI to show the wage’s value in relative terms.

Table B: Inequality in the United States

Below is a table recording income inequality in the United States before taxes and welfare redistribution. The Gini Coefficient is used as a first measure of inequality, and median income as a % of mean income as a second measure. As the Gini Coefficient increases, inequality increases. As median income decreases relative to mean income, inequality increases.

Reforms

1. Indexing - Indexing is when you attach the minimum wage to another figure, so it automatically increases if the other figure increases. Minimum wage will be indexed to the GDP per hour or income per hour. Income per hour is ideal, as theoretically it is an exact average of the income per hour that companies are paying out. GDP per hour generally changes at the same rate, so is also a usable figure. GDP per hour is essentially the average revenue produced by companies per hour. Indexing minimum wage to the GDP per hour will ensure workers continue to receive the same share of the revenue over time, as wages will automatically change with the GDP per hour. It is better to index minimum wage to the GDP per hour instead of CPI (prices), because prices don’t change at the same rate as GDP per hour due to changes in efficiency in the production process. In relative terms, prices are generally decreasing when compared to the income per hour or GDP per hour.

2. Regional Adjustments - Minimum wage will be adjusted in each state based on the difference between the GDP per hour of the state and the country. This will ensure companies have the same ability to pay in every state, and workers receive the same share of revenue in relative terms. Companies in states with higher prices, higher revenue per hour, and higher income per hour, have the ability to pay higher wages as well as the obligation to do so, since prices are higher and money doesn’t have the same relative value. If prices and income per hour are twice the amount in one state relative to another, twice the amount of income in that state has the same relative value as it purchases the same amount of labor, goods and services.

Income per hour differing by region mainly has to do with the headquarters of large corporations being located in these regions. These large corporations have sales globally and nationally, but the money returns to headquarters and is paid out to local employees. These employees then have higher incomes than the rest of the population, boosting the average income of the state they're located in. Further more since these employees have more money to spend, demand begins to increase on the local economy, causing prices, revenue and income of other local companies and branches to increase as well. Over time different regions have different levels of income per hour and price levels. Income per hour by region may differ more than price levels by region. This may be due to some regions being more efficient, so it takes less labor to produce the products. This can especially be seen when comparing different countries. Another reason for the differentiation could be that high-income residents may not spend all their money, so the increase in demand may not be as great as the increase in their income. These people may save their money, or invest it. Investments may often be non-local, so it would affect the prices of the regions where the money is invested. Products that are imported may also not have higher prices compared to other regions, unless companies adjust the prices for the region. The main benefit of living in a region with a higher income per hour is buying products from regions where the prices are lower.

GDP per hour and income per hour are the best measures of the average company’s ability to pay in a region, however, in high-income regions, high-income companies may boost the averages, as stated above, because much of their income is from non-local sales. This means inequality between companies’ income per hour may be greater, and the ratios between the lowest income per hour and the average income per hour will be greater. This means adjusting minimum wage for differences in average income per hour may put more pressure on low-income companies in high-income regions, than in low-income regions. This should benefit low-income workers in high-income regions as the difference in income per hour is greater than the difference in prices. Income per hour may be 100% higher in one state, but prices may only be 90% higher. Minimum wage could be adjusted not just based of income per hour, but taking prices into account and adjusting wages based on differences in prices. Another way to measure the ability to pay minimum wage is to potentially create a basket of companies that actually pay minimum wage, such as grocery store chains, restaurant chains, and retail store chains. The average revenue per hour or income per hour of these companies could then be calculated locally. Differences in minimum wage could then be based on these figures.

Table C: Income Per Hour

The best way to measure a company’s ability to pay wages is to calculate what will be termed the income per hour of a company. To calculate income per hour, first calculate the income of a company. The income of a company is the money that the company owns and pays out into different forms of income, whether to the owners or employees. Revenue on the other hand is the money that passes through a company, a portion is kept by the company and is their income while a portion is paid out to other companies in what could be termed exterior expenses. A company’s income can be calculated by counting total wages, salaries, profits, health care benefits, 401k contributions, employer side of payroll tax and optionally sales tax. Once this is counted, then divide by the total hours worked by the employees of the company to calculate income per hour. Different companies have different levels of income per hour, so their ability to pay may differ. This may be due to the size of the company, as smaller companies are generally less efficient, as they have less specialized workers, a smaller customer base.

Industry can impact income per hour as well. Industries with high-skilled workers generally have higher levels of income per hour as it is more difficult to produce the products. Industries with low-skilled workers generally have lower levels of income per hour, as it is easier to the products. Income per hour may differ by region as some regions have more and less money. Different branches of a company may also have different levels of income per hour.

This table records the income per hour in the United States. There are several parts of income per hour. Payroll per hour represents how much wages and salaries are paid out per hour, as well as self-employed income earned per hour. Corporate profits per hour represent how much corporations are profiting per hour worked by employees. Corporate profits were calculated by dividing federal corporate tax revenue by the federal corporate tax rate for the year (Corporate Tax Revenue ¸ Corporate Tax Rate). Dividends paid to individuals are included to. Dividends paid to other companies are not included as it becomes part of those companies’ profits or payroll. The employer side of payroll tax is simply income that is used to pay the employer side of payroll tax. It is taken out of a company’s revenues before it becomes part of their payroll or profits. Private pension contributions is money that employers take out in order to invest or save for the purpose of funding a pension plan. This money is deducted and is not counted as part of the payroll or profits. Health care benefits for employees or self-employed are also deductible and not included in the payroll or corporate profits. To calculate private health care benefits, government health care expenditures and out-of-pocket health care expenditures were subtracted from total health care expenditures. (Total Health Care Expenditures - Government Health Care Expenditures and Out-of-Pocket Health Care Expenditures). Sales tax is part of the price of the product and the income created by it, but it is transferred to the government before even being counted as revenue of a company. Total income per hour after taxes simply subtracts taxes paid from the income.

Minimum wage has various benefits, but can also have some negative side effects. The main benefit is that it ensures workers receive a certain amount of pay for their work. Another benefit is that governments don’t have to transfer money, such as with welfare, which requires paperwork, time and money. The main negative side effect of minimum wage is that it is a business expense, and if it is too high, companies may go out of business if they cannot afford to pay it. Companies may lower pay of higher-income employees to make up for an increase in minimum wage, but a company can only shift pay so much. Companies may try to raise prices to make up for an increase in minimum wage, but due to a limited money supply, prices can only go so high, as customers only have so much money. The cost of supplies may also change for a company if the companies they purchase supplies from have to increase their prices due to minimum wage being raised. Keeping the minimum wage at levels that allow companies to operate while still maintaining livable wages is crucial. Having no taxes on income below a certain level is a good way to increase the worker’s take-home income without affecting business expenses.

Table D: Price Levels by State

This table records price levels and rent by state and compares them to income per capita to show the correlation. Data on income per hour is not available yet by state, but income per capita is a close measure. The data for income per capita, similarly to GDP, is also an inflated figure. But relative income per capita by state seems to be fairly accurate, as they are each inflated by the same amount. Data for money supply per person by state is also not available. The data for prices is termed the CPI (Consumer Price Index). The CPI data is reported voluntarily by local governments, so it may not be perfectly accurate, as it is not necessarily universally reported. Rent is a single product that takes up a large percentage of income, so it is a good secondary measure. Average square footage of apartments relative to average rent may differ by state, so this could affect the accuracy of rent as a measure. Ideally, rent per square foot would be the most accurate measure. Minimum wage relative to price levels and rent is also recorded as a measure of real poverty, as it shows how much the lowest incomes can afford. Versus minimum wage relative to income per hour, which shows inequality but not necessarily purchasing power, as differences in income per hour and price levels vary by state. Data for income per capita is from 2022, while minimum wage, CPI, and rent are from 2023. This should make minimum wage, CPI, and rent appear slightly higher relative to the income per capita.

price levels by state.xlsx

Table E: Inequality by State

This table goes over inequality by state according to Gini coefficient, as well as minimum wage by state relative to the income per capita and GDP per capita. Data for GDP per capita and income per capita is from 2022, minimum wage from 2023.

inequality by state.xlsx

Table F: Adjusted Minimum Wage by State

As noted earlier, different states have different levels of minimum wage relative to their income per capita. States with the highest minimum wage relative to their income per capita are generally registering around .0220%. This rate will be used as measure to create minimum wage levels in every state in this table. This table is based on 2023 data for income per capita, so minimum wage would be adjusted based on the current levels of income per capita if implemented. Ideally, GDP per hour, income per hour, or price levels would be used as a measure to adjust the minimum wage rather than income per capita.

Adjusted Minimum Wage by State .xlsx

1 Bebusinessed. History of Minimum Wage. Retrieved from https://bebusinessed.com/history/history-of-minimum-wage/

2 Fred. Average Hourly Earnings of All Employees, Total Private. Retrieved from https://fred.stlouisfed.org/series/CES0500000003

3 OECD. Level of GDP per capita and productivity. Retrieved from https://stats.oecd.org/index.aspx?DataSetCode=PDB_LV#

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6a OECD. Average annual hours actually worked per worker. Retrieved from https://stats.oecd.org/index.aspx?DataSetCode=ANHRS#

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Corporate tax rates https://taxfoundation.org/data/all/federal/historical-corporate-tax-rates-brackets/

7a Fred. Average Hourly Earnings of All Employees, Total Private. Retrieved from https://fred.stlouisfed.org/series/CES0500000003

7b FRED. Mean Personal Income in the United States. Retrieved from https://fred.stlouisfed.org/series/MAPAINUSA646N

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8a OECD. Details of Tax Revenue - United States

Retrieved from https://data-explorer.oecd.org/vis?tenant=archive&df[ds]=DisseminateArchiveDMZ&df[id]=DF_REVUSA&df[ag]=OECD&dq=.&lom=LASTNPERIODS&lo=5&to[TIME_PERIOD]=false&ly[cl]=TIME_PERIOD&ly[rs]=GOV&ly[rw]=TAX&vw=tb

8b Tax Foundation. Historical U.S. Federal Corporate Income Tax Rates & Brackets, 1909-2020.

Retrieved from https://taxfoundation.org/data/all/federal/historical-corporate-tax-rates-brackets/

9 IRS. SOI Tax Stats - Individual Statistical Tables by Tax Rate and Income Percentile.

Table 4.3. Retrieved from https://www.irs.gov/statistics/soi-tax-stats-individual-statistical-tables-by-tax-rate-and-income-percentile

10 OECD. Details of Tax Revenue - United States

11 Employee Benefits Security Administration. United States Department of Labor. Private Pension Plan Bulletin Historical Tables and Graphs 1975-2021. (Page 17) Retrieved from https://www.dol.gov/sites/dolgov/files/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan-bulletin-historical-tables-and-graphs.pdf

12a Current health expenditure (% of GDP). Retrieved from https://data.worldbank.org/indicator/SH.XPD.CHEX.GD.ZS?locations=US

12b Out-of-pocket expenditure (% of current health expenditure). Retrieved from https://data.worldbank.org/indicator/SH.XPD.OOPC.CH.ZS?locations=US

12c Domestic general government health expenditure (% of current health expenditure) Retrieved from https://data.worldbank.org/indicator/SH.XPD.GHED.CH.ZS?locations=US

13 OECD. Details of Tax Revenue - United States

14 OECD. Details of Tax Revenue - United States

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