Bubblicious! Does anyone else find it terribly ironic that this economist is named "Tulip"?<GGG>
www2.marketwatch.com{F0CD6B69-9DD0-49F7-8230-A70D321F3B9E}
Minimum Wage Hike Plus Tight Labor Market Could Raise Flags at Fed, EPI Says
TUESDAY, AUGUST 22, 2000 11:22:00 AM EST
WASHINGTON, Aug 22, 2000 /PRNewswire via COMTEX/ -- The minimum wage hike pushed by the Clinton-Gore administration could lead to unwelcome inflationary pressures due to the ultra-tight national labor market, according to an Employment Policies Institute analysis of new research.
Research from Dr. Peter Tulip of the Federal Reserve Board suggests that higher minimum wages raise the unemployment threshold at which inflation tends to spiral upward. Some Federal Reserve policymakers use this unemployment measure, called the non-accelerating inflation rate of unemployment or NAIRU, as a key indicator for setting interest rates. Dr. Tulip's research finds that a 10 percent increase in the minimum wage would raise the NAIRU by about half a percentage point.
Both houses of Congress have passed a 19 percent increase in the national minimum wage, to $6.15 per hour. Yet the environment surrounding this proposed wage hike is unique. It has been more than 30 years since the minimum wage was increased with unemployment below 5 percent. Today the unemployment rate stands at 4.0 percent; its average for the last 12 months has been 4.1 percent.
In this labor-short economy, the aggravated ripple effects of a wage hike will extend beyond those at the entry-level wage. These costs can be expected to add substantially to already increasing cost pressures courting an inflationary spiral. The government's official employment cost index now shows serious upward pressure reflecting labor cost inflation. In each of the first two quarters of this year, the index has been 4.5 percent higher than in the same quarter of 1999.
Such inflation signs may prompt the Federal Reserve to consider further interest rate hikes. Indeed, based on Dr. Tulip's research, the proposed minimum wage hike is likely to raise the NAIRU by about a full percentage point. This implies that unemployment would have to rise substantially to avoid a continuing inflationary spiral.
The minimum wage clearly has the attention of Federal Reserve policymakers, including Fed Chairman Alan Greenspan. "The evidence that we have does suggest that there are inflationary impacts from increasing the minimum wage," Mr. Greenspan warned in congressional testimony on February 24, 1999. In congressional testimony a month earlier, Mr. Greenspan cautioned against a proposed minimum wage increase. "I would say be careful about moving the minimum wage up inordinately," he said.
Today, with the tightest national labor market in decades, politicians are hoping for a continuation of the balance between interest rates and inflation. The evidence shows that a minimum wage hike may be counterproductive in more ways than one. Based on Dr. Tulip's research, the Fed may have to raise interest rates even further to avoid inflation following a mandated wage hike. |
