The inflation bite is not that huge
Wednesday, Feb 13, 2019 - Posted by Rich Miller
* AP…
Nearly a quarter of workers in Illinois would see their pay almost double under a proposal nearing final approval in the state legislature, but inflation will take a huge bite by the time the state’s minimum wage reaches $15 an hour in 2025.
The statewide pay floor has remained at $8.25 since 2010, and new Democratic Gov. J.B. Pritzker made boosting it a central component of his successful campaign. The Senate last week approved a gradual hourly increase to $15, and the House is poised to send the legislation to Pritzker to sign before he presents his first budget plan on Feb. 20.
Illinois will join Washington, D.C., and at least four other states with a $15-an-hour minimum by 2025, an 82 percent spike in current base pay. But it may not be the momentous impact on low-wage workers that some supporters expected.
Using state labor and federal inflation statistics, The Associated Press projected that assuming the current inflation rate of 2.1 percent each year through 2025, $15 then will be worth the equivalent of $10.46 now. So instead of an 81 percent wage increase from $8.25 to $15, after inflation, low-wage workers will be taking home only 27 percent more than they are today.
That $10.46 projection didn’t seem right to me. So, I crunched the numbers myself. I subtracted the equivalent of 2.1 percent of value from each year in this chart…
1/1/19: $15
1/1/20: $14.68
1/1/21: $14.37
1/1/22: $14.06
1/1/23: $13.76
1/1/24: $13.47
1/1/25: $13.18
1/1/26: $12.90
* I talked with the minimum wage’s House sponsor Rep. Will Guzzardi (D-Chicago) last night and he found basically the same thing. Using the AP’s formula of 2.1 percent inflation per year, Guzzardi also projected what the minimum wage will be in 2025 if no action is taken, something that was missing from the AP story…
- Donnie Elgin - Wednesday, Feb 13, 19 @ 9:36 am:
Interesting data - however it fails to take into consideration the ability of employers to actually pay such a wage. Productivity and profits enable employers to pay their bills including wages. Many companies are very profitable and they are free to voluntarily pay higher wages - other are not. Arbitrarily increasing low-wage worker salaries will inevitably lower productivity and result in less employees working and or less hours for those employees.
- Iggy - Wednesday, Feb 13, 19 @ 9:39 am:
Let’s skip this minimum wage bill and go straight for a UBI, at the end of the day that’s what these people really want isn’t it.
- Anon - Wednesday, Feb 13, 19 @ 9:45 am:
Inflation is constant and on going, of course you’re going to get different numbers when the operation you use to calculate your figures is done once per year.
Do it again, but compound the average inflation daily. Doing ~3,000 operations is going to give you a different result than doing 8. It’s also complicated and laborious which is why formulas exist for it.
We don’t live in a society where we agree to devalue our currency once per year. Inflation is the impact of the cost of goods changing, and is generally measured by tracking the cost of a “basket” of goods. It creeps because the cost of goods creeps.
Don’t do bad math and then pretend like it’s good journalism.
- 47th Ward - Wednesday, Feb 13, 19 @ 9:47 am:
I wouldn’t say no to a 27% raise.
- Chicagonk - Wednesday, Feb 13, 19 @ 9:49 am:
I know I’m nitpicking because the AP is still wrong, but the best formula to use would be treating the $15 in 2025 as a future cash flow with 2.1% as the discount rate. This equates to the $15 equaling $13.24 in 2025.
- The Captain - Wednesday, Feb 13, 19 @ 9:50 am:
AP? More like C-, check your math.
- A guy - Wednesday, Feb 13, 19 @ 9:51 am:
No state has a shoddier record in predicting future revenues and conditions than our beloved Illinois. Minimum Wage should be an issue annually taking in real time data and conditions, not multi-year ramps. We may get there anyway.
- Three Dimensional Checkers - Wednesday, Feb 13, 19 @ 9:57 am:
Yeah, you need to compare apples to apples, so inflation adjusted $15 in 2025 to inflation adjusted $8.25 in 2025. That is $13.18 to $7.24 which is still an 82% increase.
- A Jack - Wednesday, Feb 13, 19 @ 10:02 am:
A better way to raise the minimum wage, once you get it above the poverty level, is an automatic annual adjustment based in the current inflation rate.
Jumping the minimum wage every ten years or so isn’t fair to workers or businesses. It’s not fair to workers because inflation does erode buying power over time. And its not fair for businesses to absorb sudden jumps in costs.
An automatic annual minimum wage increase will allow businesses to plan for additional wage costs and help workers keep pace with inflation.
- wordslinger - Wednesday, Feb 13, 19 @ 10:10 am:
–Nearly a quarter of workers in Illinois would see their pay almost double under a proposal nearing final approval in the state legislature,–
The lede is way high, and misreads the Bruno research cited.
It presumes about 25% of Illinois workers now are at minimum wage or lower. Actually, according to Bruno, it’s about 335K, or 5.6% of the 6.2 million employed in the state.
Bruno states that 23% of the workforce makes under $15 an hour, and would get something of a bump by 2025. But certainly not nearly 25% seeing their wage rate nearly doubled.
https://ler.illinois.edu/wp-content/uploads/2018/11/ILEPI-PMCR-Illinois-Minimum-Wage-of-10-13-or-15.pdf
- yinn - Wednesday, Feb 13, 19 @ 10:10 am:
This is actually a good argument for tying increases to CPI, isn’t it.
Btw, after a good run in 2018, CPI is back under 2%, thanks to falling energy prices (and perhaps a premature quantitative tightening).
Raising minimum wage is one factor that could help us shrug off the lagging demand of the recessionary period, but only if we can get control of medical insurance costs, which are beginning to gallop again.
- Perrid - Wednesday, Feb 13, 19 @ 10:42 am:
…Anon, what are you going on about? If you want to do it by day, you have to change the inflation rate too. So instead of $15*(1-.021), you could do 15*((1-.021/365)^365) - this is for 1 year-and get the exact same answer.
If you use continuous compounding, P=e^(r*t), you get e^(-.021*7) and get $12.95, instead of $12.93 (which is what Rich would have got if he hadn’t rounded each year, which is arguably correct). Note the difference between continuous and daily, after 7 years (2026), is $0.00005476, which is beyond negligible.
At least this is my memory of high school math, if I’m doing something wrong please enlighten me.
- Ducky LaMoore - Wednesday, Feb 13, 19 @ 10:58 am:
This is another good example of why we should be indexing the minimum wage to inflation. The $15/hour proposal that would raise the minimum wage over a period of years will go too far if inflation remains tame. I still say make it $10 or $10.50 and index it. That way, the lowest wage earners are getting raises every year, and businesses can adjust with a 2% or 3% increase instead of a decade of no increases and then, bam, a 35% increase.
- Thomas Paine - Wednesday, Feb 13, 19 @ 11:17 am:
AP reporters fail test of basic use of Distributive Property.
Fourth grade math.
Who’s the reporter who wrote this junk, and why didn’t they talk to the sponsor of the bill first or the governor’s press office?
- Shemp - Wednesday, Feb 13, 19 @ 11:25 am:
Met with representatives of a few employers yesterday. We have 3 employers starting anywhere from $13-$17 an hour with benefits for low skill work and they can’t find enough warm bodies who will show up on time and show up without drugs or alcohol in their system. Literally hundreds of jobs available in our small community (warehouse, sales and manufacturing) that they can’t fill for twice the current minimum wage. Point being, the market’s already willing to pay for it if you’re worth it. If you were worth more than $8.25, you can be making it already.
- Unpopular - Wednesday, Feb 13, 19 @ 11:58 am:
A nice article.
- anon2 - Wednesday, Feb 13, 19 @ 12:14 pm:
How much value has inflation taken since the minimum was raised to $8.25 nine years ago? Employers are happy to see their labor costs decline every year.
- Odysseus - Wednesday, Feb 13, 19 @ 9:05 pm:
“they can’t find enough warm bodies who will show up on time and show up without drugs or alcohol in their system.”
So find an employment structure that allows those people to do the work. Performance is performance is performance.
- Techie - Thursday, Feb 14, 19 @ 9:40 am:
@ Donnie Elgin, “Arbitrarily increasing low-wage worker salaries will inevitably lower productivity and result in less employees working and or less hours for those employees.”
It’s not arbitrary - $8.25 an hour is a pittance, and not a living wage. Moreover, when employees’ labor is worth more, employers have a greater incentive to ensure that they provide good training and opportunities for continuing education/training. So I would not be surprised to see greater productivity - why would you think it would go down? You didn’t really explain that, just stated it.