How Do Minimum Wage Hikes Affect The Economy?

The United States has one of the lowest minimum wages of any modern country in the Two people working in a bakeryworld. Our modest salary floor impacts our economy on every level, from the rising underemployment rates to a bloated welfare program that chiefly rests on the backs of the struggling middle class.

But all of this is subject to change: The arrival of 2019 has brought a wave of minimum wage hikes at many state and local levels along with a push to bring the national minimum wage up to $15 by the year 2024. In total, 21 states and Washington DC have increased their minimum wages, with the biggest jump of $1.00 per hour more being passed in California, Maine and Massachusetts. There are now a total of 29 states with a minimum wage that surpasses the federal level, which has remained stagnant at $7.25 for more than a decade.

The recent wage increases impact 5.2 million workers across the country. While at first glance this might seem like fantastic news for the economy, financial experts are dubious about how recent hikes and the proposed increase in the federal wage will impact the national economy.

The push to boost the federal minimum wage to $15 an hour is more dramatic than any wage hike this country has ever seen. This factor makes it impossible for economists to draw on studies and actual history for conclusions about the effects of the proposed hike. However, based on market trends and the fundamental laws of economics, they’re predicting several negative fallouts from the hikes.

Let’s explore what happens when minimum wages increase.

How do wage increases affect the job market?

Economists are predicting the proposed hike in the federal minimum wage, along with the local and state increases that have already passed, will have two negative effects on the job market:

1.) A surge in move-outs to the suburbs

An increase in local and state government minimum wages will likely push employers to move across borders to avoid paying higher wages, particularly from central cities to suburbs.

For example, Washington, D.C. has raised its minimum wage to $14 an hour. This may lead to a mass exodus of Washington businesses as they move toward locations with lower minimum wages in surrounding areas. A move to a suburb like Arlington, Virginia, where business owners can pay their workers almost half the hourly wage they’d need to cover in Washington, will help them remain profitable.

2.) Businesses cutting corners

Businesses forced to double their workers’ pay or even to modestly increase it will need to find a way to continue turning a profit. They will likely attempt to cut corners any way they can. This may translate into letting workers go, replacing humans with robots where possible, or even cutting down on their level of service to reduce the need for human resources. For example, fast food joints might start using machines instead of human workers and hotel chains may start skimping on their cleanups between guests to compensate for increased payroll.

Regardless of the way that businesses choose to cut corners, it will likely lead to an increase in unemployment rates and underemployment rates across the country. It may also trigger a surge of illegal work among workers who suddenly find themselves out of a job.

How do wage increases affect the consumer?

When all the dust settles, it is the average consumer who will likely bear the brunt of the minimum wage hike.

Most companies hiring minimum-wage employees are small businesses with profit margins that are too thin to absorb a serious hike. These businesses will be forced to pass on their higher expenses to consumers. Grocery prices will shoot up, labor costs for services and repair persons of any kind will rise, and fast food meals will see a noticeable price increase.

Predictably, the consumers most likely to be affected by the hike are the poor and middle class, who tend to frequent businesses that hire minimum-wage workers. Ironically, the same workers rejoicing over the proposed hike will likely be those who have to pay for it most.

How do wage increases affect federal taxes?

One positive impact of a minimum wage hike is the hope that an increase in wages will reduce the number of workers who are dependent upon government assistance programs, thus reducing the average taxpayer’s burden. Of course, this is pure speculation and is not based upon any studies of similar increases.

Also, when low-wage workers are pushed over the qualifying threshold for government assistance, they may be coming home with less pay after a wage hike.

While no one can say for sure how a minimum wage hike will affect the economy on a national and individual level, economists predict it is far more likely to have a negative effect than a positive impact.

Your Turn:

Do you support a dramatic minimum wage hike? Why, or why not? Share your opinion with us in the comments, below.

SOURCES:
https://www.google.com/amp/s/www.washingtonpost.com/amphtml/news/wonk/wp/2018/01/11/what-does-a-15-minimum-wage-do-to-the-economy-economists-are-starting-to-find-out/

https://www.google.com/amp/s/www.forbes.com/sites/adammillsap/2018/09/28/how-higher-minimum-wages-impact-employment/amp/
https://www.google.com/amp/s/www.brookings.edu/opinions/a-15-hour-minimum-wage-could-harm-americas-poorest-workers/amp/
https://www.heritage.org/jobs-and-labor/report/15-minimum-wages-will-substantially-raise-prices
http://econweb.ucsd.edu/~mwither/pdfs/Effects%20of%20Min%20Wage%20on%20Wages%20Employment%20and%20Earnings.pdf
https://www.google.com/amp/s/www.usnews.com/news/best-states/articles/2018-12-31/minimum-wage-increases-in-20-states-in-2019%3Fcontext%3Damp
https://www.google.com/amp/s/amp.businessinsider.com/minimum-wage-2019-state-map-2018-12

Why Beer, Cars And Washing Machines Are About To Get More Expensive

The president has made good on his promise to come down hard on the country’s trading partners. As a tax-paying citizen, who cars in dealer showroomlikely purchases more foreign-made goods than you realize, you owe it to yourself to learn how these new tariffs will impact your wallet. And we’re here to help you do just that!

First, let’s explore the general concept of tariffs and review those that recently went into effect.

A tariff is a tax on imported goods. The individual consumer or American company purchasing the imported product is responsible for paying the tax associated with it. The ultimate purpose of a tariff is to give an edge to U.S.-manufactured goods by raising the prices of their foreign-crafted counterparts.

Tariffs have long-lasting effects on the economy that fall beyond their intended purpose: When a company is forced to pay more for its materials, it will likely pass this extra expense onto its own consumers. Alternatively, they may choose to cut costs by hiring fewer workers and giving fewer raises to employees. Some companies will even move part of their production overseas.

The first of the recent wave of tariffs, targeting washing machines and solar panels, went into effect earlier this year. These were followed by a recent 25% tax on imported steel and a 10% tax on imported aluminum. Another wave of tariffs will go into effect later this month, focusing on hundreds of Chinese industrial goods. More are still planned, including taxes on Chinese-made TVs and cellphones.

Let’s take a look at how these tariffs impacted various industries and what it all means for the American consumer.

1.) Washing machines

The first move in the trade war taxed imported washing machines by 20-50%. The tariff was passed in an effort to stop Whirlpool from losing out to Korean-based Samsung and LG, who were grossly undercutting Whirlpool’s prices. While the move initially boosted the American company’s stock and employee base,the more recent tariff on steel will push up Whirlpool’s costs and likely offset any previous gains.

What this means for you: The price of washing machines has jumped by 17% in the last three months. Once the steel tariff hits the industry, those prices are likely to increase again.

2.) Solar panels

Imported solar panels were hit with a 30% tariff in January, 2018. However, there are plans for this tax to gradually decrease over the next few years. Like the tariff on washing machines, this tax was imposed because American manufacturers were losing out to offshore companies that were undercutting prices.

An incredible 80% of all solar panels in the U.S. are imported from overseas. For businesses that manufacture solar panels, this tariff is great news for their bottom line. But the many companies in the business of installing, marketing and distributing those panels have been dealt a near-fatal blow.

What this means for you:  The average price for solar panels is expected to increase by 40% over the next year.

3.) Aluminum

The 10% tax on imported aluminum was created to help American manufacturers of this heavily used raw material. Unfortunately, though, the many American companies that use aluminum for the production of their own goods will be forced to pay more for this essential metal. They will then pass this extra expense onto their customers.

While the administration is hopeful that the tariff will force the country to produce more aluminum, there’s no way for America to manufacture enough of this raw material to meet the country’s needs.

What this means for you: Your favorite drinks will likely see a price increase. Lots of beverage companies, like Coca-Cola and Budweiser, rely on cheap and imported aluminum to keep their costs down. You might see a price hike in lots of canned food products as well.

4.) Steel

Steel was recently slapped with a hefty 30% tariff. Like the aluminum tariff, it was passed with hopes that the U.S. will increase its steel production, thus creating more jobs. But, in another echo of the aluminum tariff, the U.S. doesn’t have the capacity to produce enough steel to meet its needs. It is also likely that the negative effect the tariff will have on other industries will more than counterbalance any gains.

What this means for you: The steel tariff has the largest impact of all; steel is used in the production of a huge scope of goods.

Here are some industries that will be affected by the steel tariff:

  • Cars. The American auto industry produced 11 million cars last year. With close to 2,000 pounds of steel used in the production of each car, the auto industry is going to be hit hard by the tariff. Naturally, car prices will rise dramatically.
  • Construction. Steel is used heavily in construction and renovations. Expect to see an increase across the entire construction industry.
  • Airline travel. Steel is a major part of every airplane. Expect to see flight costs rising thanks to more expensive steel.
  • Appliances. All major household appliances, like refrigerators and washing machines, are created from steel – and they’re all about to get more expensive.

There’s not much you can do about the upcoming price hikes, but now that you know what to expect, you won’t be in for much of an unpleasant surprise when you purchase products manufactured overseas or crafted using imported materials.

Your Turn: Do you think the tariffs will ultimately benefit the U.S.? Share your take on the trade war in the comments.

SOURCES:
https://www.timeinc.net/time/money/5316029/trump-tariffs-prodcut-prices

http://time.com/money/5295529/donald-trump-tariffs-beer-iphones-more-expensive/?xid=homepage
http://money.cnn.com/2018/05/31/news/economy/aluminum-steel-tariff-impact/index.html
https://www.bbc.com/news/amp/business-42784380

Rising Interest Rates

If you follow the national business news, you are likely getting mixed messages about thenewspaper with interest rate headline state of the economy. While never very reassuring, pundits’ opinions on the stock market and the country’s economic state are changing as frequently as the weather.

But there’s one area that’s been constant for some time now: rising interest rates. If you’re thinking of taking out a mortgage, or any other large loan, in the near future, you might be waiting until those rates start going down again.

Here’s why that might not be the best idea.

Interest rates will continue to rise throughout 2018.

Experts predict that interest rates on financial products will continue to increase throughout the year. There are several factors triggering this rise, none of which are likely to be resolved anytime soon. Whether you’re interested in taking out a personal loan or a second mortgage, 2018 may not be a very good year for borrowers.

It’s not looking too great for those who are looking to take out short-term loans either. The U.S. central bank raised short-term interest rates a total of three times in 2017, and that trend is expected to continue. Experts claim 2018 will see an additional three interest rate hikes, each being 0.25%. If you need to borrow money from Destinations Credit Union, it’s best to consider your plans sooner rather than later to ensure you can lock in before rates get higher.

The inflation factor

Unemployment rates may be down across the country, but wage growth continues to crawl at an almost nonexistent pace. This, in turn, leads to limited price growth, which keeps the inflation rate stagnant. However, the feds are expecting all of this to change in the coming year. They expect wage growth to finally kick off and then set in motion an uptick in inflation and price growth.

The government wants to stay ahead of any surge in inflation. It does so by increasing interest rates even before there is clear evidence of an inflation peak. In fact, just last month, the feds raised interest rates on short-term loans yet again, citing an inflation scare at the beginning of February as the primary factor behind their decision.

Financial institutions and credit card companies pattern their own interest rates after the government’s rate. For this reason, it’s best to work on aggressively paying down outstanding debt you have before you’re hit with increased interest rates.

Government deficits and tax cuts

Long-term interest rates have been rising since December. This is largely due to the growing government deficit linked to recent tax cuts. The pending two-year budget plan will put the government even deeper into the red and likely cause those rates to climb even higher.

In short, this trend of rising rates will not become history for a long while.

Mortgages

Mortgage interest rates are now at an all-time high; they are currently close to 4.6% and are up more than 20% from a year ago.

There are multiple factors driving this increase, including the administration’s proposed tariffs on steel and aluminum and the associated concerns over the U.S. trade market.

For the most part, though, mortgage interest rates are based on the 10-year Treasury yield. When bond yields rise, so do mortgage rates. The recent tax overhaul caused investors to favor stocks over bonds, and consequently mortgage rates have been climbing since the tax plan was first introduced in September.

Some experts are actually predicting a turnaround for mortgages in 2018. They are hopeful that the expected volatility in the yield curve will trigger a similar curve for mortgages, possibly even causing them to dip below 4% sometime this year. However, all agree that by year’s end, the mortgage rate will settle at a stable 4.5%.

No one can be certain of anything, though. And waiting until the rates drop might prove to be pointless. In fact, you might even end up paying a higher rate because of that delay.

The good news

Take heart; it’s not all doomsday forecasts on the economic front!

Greg McBride, Bankrate’s chief financial analyst, predicts a great year for returns on savings. He claims that 2018 will be beneficial for all savings accounts, and especially for CD holders, with an average one-year CD yielding a 0.7% return by the end of 2018.

If you’ve been thinking about opening a share certificate or other ways to grow your savings, talk with Destinations Credit Union, and start putting your plan into action!

What it means for you

Let’s review the practical steps you can take in this economic environment:

1.)   If you’re thinking of taking out a mortgage or another long-term loan, don’t wait for rates to decrease; it isn’t likely to happen anytime soon.

2.)   Try to pay off your debt at a quicker pace than you’ve been doing until now to avoid getting hit with rising interest rates.

3.)   2018 is a great time to increase your savings and to open a share certificate.

Volatile economy got you stressed? No worries! At Destinations Credit Union, we’re always here to help you through any financial turn. Call, click, or stop by today!

Your Turn: What steps are you taking in the current financial climate? Paying down debt? Increasing your savings? Tell us all about it in the comments!

SOURCES:
https://www.kiplinger.com/article/business/T019-C000-S010-interest-rate-forecast.html  

https://www.google.com/amp/s/www.bankrate.com/finance/mortgages/interest-rates-forecast.aspx/amp/  
https://www.google.com/amp/s/www.bankrate.com/mortgages/analysis/amp/