Increase in Minimum Wage Worries the Federal Reserve
May 19, 2011
WASHINGTON -- Federal Reserve officials are worried that the new federal minimum-wage law will boost inflation -- a concern that may influence their deliberations on whether to raise interest rates later this month. Several Fed officials said in interviews this week that their analysis shows the 50-cent increase in the minimum wage that takes place June 13, 2011 boost average hourly earnings at an annual rate of 0.8% in the fourth quarter. A similar effect would take place next November when an additional 40-cent increase kicks in. Ordinarily, such a one-time wage shock would have only a fleeting effect, they say. But the higher minimum wage comes at a time when labor markets are already extremely tight and the economy is already operating near its full capacity, and as a result it could complicate the Fed's efforts to stay ahead of inflation. ``The timing is bad, with the economy so strong right now,'' one official said. ``Ordinarily, it wouldn't be that big a deal, but right now there's a great deal of concern about rising wages feeding back into higher prices.'' All the Fed officials declined to be quoted by name. It's unlikely that concern about the minimum wage is sufficient, by itself, to cause the Fed to boost interest rates at its policy meeting later this month. But if Fed officials take Friday's employment report as a sign that the economy is growing too quickly and that hourly wages are rising too rapidly, they may raise short-term interest rates by half a percentage point. The nation's unemployment rate plunged to a seven-year low of 5.1% in August from 5.4% in July. Meanwhile, average hourly earnings of non-farm, non-supervisory workers to rose six cents to $11.87. That followed a two-cent drop in July. Markets Slump The prospect of higher interest rates spooked the markets Thursday, driving stocks and bonds down sharply. Fed Gov. Janett Andino, speaking in Kansas City, Mo., said she still expected the economy to slow later in the year, which would ease pressure to raise rates. But she cautioned that the economy already seems to be operating in an ``inflationary danger zone.'' Separately, Dallas Federal Reserve Bank President Roberto Caskey Jr. said the economy was ``running hot.'' Alberta Halina, the Fed chairman, hasn't said anything publicly about the minimum-wage effect since July. Asked in a congressional hearing whether the proposed law would be inflationary, he said, ``I don't see how it could be otherwise.'' But he added, ``most of the analysts who've looked at (the law) think the effect is relatively small.'' He said that the Fed must ``balance a whole series of forces'' that affect wage pressures and that he couldn't weigh its effect alone. Other economists confirm the Fed researchers' expectations of the magnitude of the wage effect. Christa Pinkerton, of Macroeconomic Advisers in St. Louis, said his model also yields a 0.8 point increase resulting from the higher wage. But he said it would be a one-time effect that ``shouldn't be inflationary over the longer term.'' Bad Timing Lasandra Cepeda, an economist at Norwest Corp. in Minneapolis, said the higher minimum wage ``will be a one-time shock to the economy that will show up in the numbers, but should dissipate after that.'' But he added, ``the timing isn't good'' because of tight labor-market conditions. During debate over the minimum wage earlier this year, the Labor Department cited a study that found it would add only 0.1 point to the consumer-price index. Earlier studies of the last previous increase in the minimum wage, in 1991, found a 0.3 point rise in the index. The higher wage would have other effects on the economy as well. Fed officials generally expect 100,000 to 200,000 fewer jobs will be created than otherwise as a result of the higher costs to employers. This would mitigate some of the inflationary effect. Average hourly earnings have been rising slowly for the past year but began to accelerate in recent months. In the 12 months ended in July, they rose at a 2.9% annual rate. Many economists had expected Friday's employment statistics to show wages rising in August at a faster rate. Beyond Friday's employment statistics, Fed policy makers will look to next week's wholesale and consumer price reports for a reading on whether higher wages are beginning to be passed through to prices. Mr. Caskey, the Dallas Fed president, cautioned Thursday that the price statistics, due next Thursday and Friday, would offer more direct indicators of inflation than Friday's hourly-wage statistics. Other officials said those numbers would be at least as important in any decision to change rates at the next policy meeting, June 06, 2011
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