The Economy -- Cape Cod Economics, Version 2001

Spreading wage increases could boost inflation to new levels.

It is always challenging to revisit the Cape Cod economy each summer. It is almost like visiting a foreign country, albeit one where the natives speak a variant of English. Recently some of the bemused academics in these parts completed a study showing that the "poverty level" for a family of four living on Cape Cod is $40,835. My first impression was that that's just about the quality of work to be expected from economists in the People's Republic of Massachusetts. But after thinking it over for a while, I edged closer to the opinion that if in fact the minimum wage in eastern Massachusetts is double the national average, maybe certain basic facets of the cost of living are also double the national average. For many years economists have wrestled with the question of the economic impact of raising the minimum wage. Admittedly, the boost from $4.15 per hour to $5.15 per hour during the Clinton years did not have the expected effect: Inflation did not rise, and the unemployment rate continued to drop. Several hundred thousand jobs in minimum-wage manufacturing industries, including textiles and apparel, moved offshore, but those employees were able to find other jobs. McDonald's-style employers handled the situation by increasing productivity through the simple expedient of having people wait longer for their "fast" food. Apparently the airlines followed the same strategy for their booking clerks. The reason the minimum-wage increase had a negligible impact on the overall economy was that most people were already being paid more than the minimum wage, with less than 1% of the labor force affected by the raise. However, when the minimum wage rises from $5 to $10 an hour as it did in eastern Massachusetts, costs and prices follow suit. In this respect it will be interesting to see whether Harvard University boosts its tuition an extra $1,000 per year to pay for the higher cost of janitors. Meanwhile, the cost of housing in the Boston area, buoyed both by rising wages and the liberal belief that Development is Bad, has now passed other historically high-cost areas such as New York and Los Angeles, and is 48% above the national average. But there is a larger issue here. Several years ago the voters of Massachusetts, following California's lead, voted in Proposition 2.5, which says that taxes on property that remains with the same owner cannot rise more than 2.5% per year unless the voters of a given township or county vote for a bigger increase. Earlier this year, the Barnstable County school district said it was running out of money, and requested that a modest tax increase be put on the ballot. Who could be against aid to education in arguably the most liberal township in the country? As it turns out, nobody but the voters. The tax increase was soundly defeated in the heartland of liberalism. Of course all the local editorial writers were properly aghast, including the Cape Cod Times, which is owned by Dow Jones & Co. Inc. Most people who vote on Cape Cod, unlike us interlopers who have lived here for only a few decades, are not wealthy. Like many people in the rest of the country they are struggling to make ends meet, as actual price levels in eastern Massachusetts, as opposed to the figures published by the Bureau of Labor Statistics, have risen faster than their wages. People fight back on the one hand by vetoing any further tax increases, and on the other hand by pushing harder for bigger wage increases. Eventually, if the monetary authorities do not take countervailing action, that leads to a higher rate of inflation. In the final analysis, the overall inflation rate will not rise very much because Harvard janitors are now earning $10 an hour, or because student auto mechanics are being paid $30 an hour on the Cape. However, as the reaction to reduced real wages spreads, unless the Fed decides to fight back, eventually those higher wages will be passed along to consumers in the form of higher prices, and the long-dormant inflationary spiral will once again return. Michael K. Evans is chief economist for American Economics Group, Washington, and president of the Evans Group, an economics consulting firm in Boca Raton, Florida.

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