In January, members of Congress proposed new legislation to increase the national minimum wage to $15 an hour from $7.25, where it has been for more than a decade, but what happens when the minimum wage rises?
It depends on monetary policy, said Kansas City Federal Reserve Economists Andrew Glover and Jose Mustre-del-Rio in a white paper Thursday.
FOMC AT THE HELM
At the time of the proposed increase, the federal funds rate—the target interest rate at which banks borrow and lend to each other overnight—had been near zero since March 2020, after the Federal Open Market Committee sharply cut the rate in response to the COVID-19 shock, the economists said.
The FOMC has said it wanted an overall, long-term 2% inflation rate and would allow inflation to rise above this target for a short time in order to counter the less-than-2% inflation currently in place.
The effects of any such minimum-wage bill may depend on the stance of monetary policy during and after the bill’s implementation, they said. Changes in interest rates can affect household spending, potentially influencing how a minimum wage increase passes through to the overall economy.
For example, if a minimum wage increase leads to a rise in aggregate prices, and the central bank raises nominal interest rates more than one-for-one with increases in inflation, then the real interest rate rises in response to an increase in the minimum wage, the economists said. Because higher real interest rates make saving more attractive than spending, aggregate demand may fall in turn, leading the minimum wage increase to have a negative effect on employment and prices.
(A market analyst said central banks around the world have discovered the power of interest rates in controlling an economy. At times, the European Central Bank had negative interest rates, which were an attempt to encourage people to consume rather than save. Regulators wanted no money to lay around unused, so they charged people for saving money.)
However, if the central bank keeps nominal rates constant, or raises nominal rates less than one-for-one with increases in inflation, then spending will become more attractive than saving, which can boost aggregate demand, they said. In this case, the minimum wage could have a positive effect on employment and prices.
“Our model-based analysis suggests that the Federal Reserve’s tolerance of higher temporary inflation could support any expansionary effects of a minimum wage increase and mitigate any contractionary effects,” the economists said.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $122.43 to $126.50 per cwt, compared with last week’s weekly range of $125.41 to $126.44. FOB dressed steers and heifers went for $192.44 to $202.64 per cwt, versus $198.02 to $199.92.
The USDA choice cutout Thursday was down $0.53 per cwt at $337.92, while select was down $2.60 at $304.97. The choice/select spread widened to $32.95 from $30.88 with 66 loads of fabricated product and 15 loads of trimmings and grinds sold into the spot market.
The USDA reported Thursday that basis bids for corn from livestock feeding operations in the Southern Plains were unchanged at $1.60 to $2.00 a bushel over the Sep futures and for southwest Kansas were unchanged at $0.40 over Sep, which settled at $5.16 1/4 a bushel, up $0.00 3/4.
The CME Feeder Cattle Index for the seven days ended Wednesday was $157.94 per cwt down $0.41. This compares with Thursday’s Sep contract settlement of $160.30 per cwt, down $2.62.