Louisville Metro Council: At least put minimum-wage COLA in economic purgatory — The Bluegrass Institute for Public Policy Solutions

Ironic, isn’t it, that during the very week fiscal courts in three Kentucky counties passed the first countywide right-to-work ordinances in the commonwealth and the country, a government mandated minimum-wage increase was the policy du jour in Kentucky’s largest city and its primary economic engine.

No doubt the rumblings in recent days that the Louisville Metro Council will reach a “compromise” and raise the minimum wage to $8.75 instead of the $10.10 that the council’s liberal members clamored for will be hailed as some kind of legislative middle ground.

It is no such thing.

This policy will instead harm the very people it’s intended to help. If the mayor had any political courage, he would say that loudly with a veto. Certainly, no one should think he’s some kind of great negotiator.

This is a bad deal for everyone except for the council’s populists who no doubt will use this for political gain in their next election.

But I’m sure part of their campaign’s talking points won’t include anything about how the measure will cause the city to lose even more of its ability to compete with Indiana – which is right across the river, or about how that by raising the minimum wage, the bottom rung of the employment ladder will be cut off for young, inexperienced workers from low-income homes who desperately need an opportunity to break into the workforce and get a start.

It will, however, bring glee to the labor unions who fund the political campaigns of its supporters. Unions thrive on minimum-wage increases because they drive up wages for workers on higher rungs of that same employment ladder.

While $8.75 is better than $10.10 in terms of harming fewer people – as those who provide at least $9 worth of productivity to their employers will likely get to keep their jobs – I’ve become aware of an attempt by some on the council to attempt adding an automatic cost-of-living adjustment (COLA) to the higher minimum wage, further harming the city’s economic competitiveness and creating even greater uncertainty for the business community.

Adding a COLA to a minimum-wage increase is economic idiocy and political cowardice. A COLA offers the potential of driving up wages significantly every few years without its supporters being forced to deal with a vote and at least be accountable for each such increase.

It’s unsound policy for several reasons:

Credible economic experts offer valid concerns related to how the Consumer Price Index (CPI), which COLAs attached to minimum wages are often based upon, is calculated for a particular region.
The index is calculated by the Bureau of Labor Statistics (BLS) based on national data. Much the same way that $7.25 goes much farther in Kentucky than in New York City, oftentimes a cost-of-living adjustment fails to reflect the real costs in the areas where the COLA is applied.
The CPI overly inflates the cost of living and rate of inflation for the nation as a whole.

An alternative index, the Personal Consumption Expenditures deflator (PCE), meanwhile, consistently produces lower inflationary numbers. Using the PCE to adjust for inflation equates that to $8.28 per hour in 2013 dollars, while the CPI equates it to $10.56 per hour in today’s money. Critics also point to these other biases in CPI calculation:

It inadequately accounts for changing consumption patterns (such as Americans purchasing more smartphones as prices fall).
It doesn’t account for new online sales and bargain retail outlets (such as Wal-Mart, Amazon).
It inadequately adjusts for quality improvements in goods and services (Some goods that are becoming more expensive are also longer lasting and of higher quality).

Comparing CPI and PCE calculations, it appears that the CPI artificially inflates cost adjustments by about 1 percent per year. Though small initially, the impact of this inflation compounded over decades offers the potential of seriously distorting earnings.Indexing the minimum wage to CPI relies on a self-fulfilling circular logic:Instead of helping workers adjust to a region’s cost of living, implementing a COLA on the minimum wage actually makes the region less affordable.Rather than just giving low-wage workers a fair shake as proponents suggest, COLAs actually create unprecedented minimum-wage levels that price businesses from the labor market and price consumers out of the market for goods and services. Much like many other well-intentioned minimum-wage increases around the country, these COLAs ultimately hurt the very people that they were designed to help.Meanwhile, in our very own commonwealth, Fulton, Warren and Simpson Counties are on their way to being the first three right-to-work counties in the nation. Bowling Green, the economic center for Warren County, currently has 5 percent unemployment, which is about 1 percent lower than the nation overall and one of the lowest rates in the Bluegrass State.Contrast that performance with Pine Bluff, Arkansas, which has a COLA imbedded into its minimum-wage law and an 8.7 percent unemployment rate to go along with it. Others with a COLA show similar performances, including Arizona (6.6 percent unemployment), Syracuse, New York (7.2 percent), Sacramento, California (8.1 percent), Rochester, New York (7.8 percent) and Oakland, California (8.8 percent).The inability by some legislative bodies to implement common sense, pro-growth policies is having long-term negative impacts on these regions’ competitiveness and economic viability. There’s no reason to believe Jefferson County won’t follow the same path.A majority of Louisville Metro Council members seem hell-bent on passing some kind of minimum-wage increase; the least they could do is help the city by placing the idea of an embedded COLA in economic purgatory for now.