Under proposals currently being pushed for by Obama, the US hourly minimum wage would increase from US$7.25 in 2013 to US$9 by the end of 2015. America’s minimum hourly wage is far lower than its average hourly wage of US$19.8 in 2012, creating a widening income gap in American society. The impact of the move would be overwhelmingly positive for America. It would help reverse its income inequality, boost consumer spending and increase labour productivity. It is also unlikely to contribute to a rise in unemployment, though it could slow the ‘reshoring’ trend of American manufacturers bringing jobs back to the USA from China and other emerging markets.
Minimum wage would help close income gap and boost consumer spending
America’s minimum wage is far below its average hourly wage of US$19.8 in 2012, which has created a big social divide. Its ‘Gini index’ score is high for a developed country. The Gini index is used to measure income inequality in a society, where a score of 0 in the index represents perfect income equality in a society, and a score of 100 is total inequality. Down from 46.3 in 2007, America’s score of 47.8 in the 2012 index ranks it 28th out of 30 developed countries: only Singapore and Hong Kong had more unequal societies. Click to Tweet!
The raise in minimum wage would be a positive for America’s FMCG industry as it would help to reverse the income gap and increase the spending power of low earners, who are predominantly young and have only secondary education. While this will be likely to have little impact on big ticket items such as cars and white goods, it should generate spending on beauty and personal care and trading up in food and beverages and boost apparel sales, an industry for which young people are key consumers.
The move may also help to increase labour productivity as staff turnover would be likely to decrease, reducing inefficiencies caused by inexperienced staff and reducing recruitment costs for businesses.
Increase unlikely to raise US unemployment levels
A concern about the proposed raise in minimum wage is that it would increase unemployment among those competing for the lowest paid jobs in America. Based on the introduction of minimum wages in other similar economies this is not likely to happen. The United Kingdom introduced a minimum wage in 1999. Instead of increasing unemployment, it decreased to 6.0% of the economically active population in that year from 6.2% in 1998.
Raise could slow US ‘reshoring’ trend
A snowballing trend among American manufacturers is ‘reshoring’ jobs back to the USA which were previously outsourced to China and other emerging countries. Wage costs are a major factor in the trend. Labour costs are rising in China which is making the prospect of transferring manufacturing work back to the USA more appealing once transportation and shipping costs are also factored in. If the minimum wage is raised in the USA, this could stop some low end manufacturing work being transferred back to America. On the whole however, the benefits of the proposed increase in the minimum wage would far outweigh the negatives. Click to Tweet!