Labor vs. capital spending

With minimum wage in place, the federal government keeps the cost of labor high, while the private sector keeps the price of goods low

Paul Abell / AP / File
Atlanta resident Marilynn Winn holds her paycheck that shows her minimum wage pay in this July 22, 2009 file photo. A federal minimum wage increase to $7.25 an hour took effect in July 2009. Do federal mandates on minimum wage drive up the unemployment rate?

New York Times economics reporter Catherine Rampell provides a wonderful graphic presentation of business spending on equipment and software vs. labor since Q2, 2009 in her ‘Economix’ piece Man vs. Machine.

Rampell points out, “Spending on equipment and software has risen 25.6 percent in the last seven quarters, while companies’ aggregate spending on employees has risen only 2.2 percent.”

She points out that the gap between hiring and capital spending is wider than any other post recession recovery and puts her finger on the reason. “One reason hiring has been so sluggish is that equipment and software prices have been dropping quickly, while labor costs have been rising fast.”

While total compensation costs have risen 3+%, equipment and software prices have fallen by 2+%.

Some of the compensation increase is a hike in the cost of benefits (healthcare). However, Rampell misses the fact that the federal minimum wage was increased from $6.55 an hour to $7.25 an hour in 2009. Also during the boom, a number of states passed laws to index their minimum wages to an amount exceeding the federal minimum. For instance in 2009, a law was passed in Alaska keeping the minimum wage in that state 50 cents above the federal level. Nevada’s minimum wage is indexed to inflation and the minimum jumped 70 cents a year ago from $7.55 an hour to $8.25.

So while the private economy performs the miracle of lowering the price for goods, the state, by force, keeps the cost of labor high.

The result will be high unemployment for many, many years.

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