THE BLOG
12/15/2013 04:48 pm ET | Updated Feb 14, 2014

Gasoline Price and Minimum Wage Increases in the Scheme of Job Creation and Economic Growth

It has been approximately five years since we got out of the Great Recession. What have we observed in the economy since? We have seen a very slow pace of economic recovery as job creation has been lackluster and unemployment rate has been slow to fall. What is puzzling is that this is happening in midst of one of the most aggressive expansionary monetary policies in the nation's history, the expenditure of $85 billion monthly to purchase government securities. The supply-side economic endeavor has not trickled down to the group that should help to spur the economy as they increase spending on the purchase of goods and services, the middle class and the poor.

The following excerpt comes from another piece I wrote, titled "Gas Prices: Should They Continue to Rise?"

"Elsewhere, in my discussion of quantitative easing, I pointed out that the purchasing of billions of dollars of government securities, even though it is meant to "release money into the economy," is not going to get us out of the growth dilemma in which we find ourselves. That money is not going directly into the hands of the middle and lower income Americans who spend it to purchase the goods and services that will spur job creation and employment. Increases in gas prices go to reduce consumers' disposable income, purchases of goods and services, gross domestic product, and lead to higher unemployment. Efforts must be made to address the problem of rising gas prices. Some months back, there was a move to shut down some oil refineries across the eastern coast. I was wondering why the process should be allowed at a time when we needed and still need refineries to produce more gas to lead to its price reduction. It seems that refined oil is getting concentrated in fewer hands which can collusively, it appears, manipulate prices for greater profits. There should be a study to determine if, in fact, that is the case but intuitively, it seems so."

We have not witnessed any significant change since the article was published. It is true that jobs are being created but it is at a slower pace relative to the policy meant to improve it. Recently, spot oil price at the New York stock Exchange has been rising. Some blame it on seasonal variations. As temperatures plummet, more oil is needed to heat homes and other buildings. This is occurring at a time when more natural gas is brought in to heat these places and drive cars. More efficient cars and railroads that use alternative sources of energy are increasingly being produced and used. Should these not influence the seasonal trend in oil (gas) consumption and keep its price lower than the year before? About a week ago, spot oil price fell to about $92 or $93 a barrel. Today, it has steadily climbed back up to $98. No one will be surprised if by this weekend, beginning December 13, 2013, it hits $100.

Recently, it was observed that "oil" on the New your Stock Exchange (NYSE) was posted as "crude Oil" instead of just "Oil," which is has been. From our research on "Oil Speculation" we found a divergence in price between crude oil and "spot oil price" (STP). The latter is the one seen and posted on the NYSE while crude oil is the price at point of production. Crude oil prices were lower than STP throughout the period of our study. Any attempt to now post oil (STP) on the NYSE as "crude oil" will seem misleading to those of us working with these data and continue to mask the actual speculation inherent in oil prices.

Based on these discussions, how should the increase in minimum wage affect the economy: While we wait to collect data and conduct empirical analysis, let us spend some time mentioning what seems intuitively obvious in the policy initiatives about improvement in minimum wage. It has been stressed above that as gas prices increase at the pump, consumer's disposable income (DI) falls further. The DI is what is left of ones gross income or pay after deducting taxes.

The reduction in DI prevents the middle class and poor from purchasing and consuming goods and services. Let us remember that it is the increase in such purchases that leads to increase in production to replace the reduction in store inventories. The increase in production requires workers, meaning that there will be a significant increase in employment and a further reduction in the unemployment rate.

The question is how does this affect minimum wage? For those who work with mostly society's disadvantaged and the middle class that is shrinking to the poor class, it is always music in their ears if minimum wage increase is recommended and implemented. But is there a good or wrong time to ask for and implement minimum wage increase? It would be argued that the correct time is when the economy has picked up and job growth has strengthened to where the unemployment rate is hovering around five or six percent. It means that businesses, especially the small ones that tend to hire those on minimum wage, would be doing robust business and earning profits. That is the time they would be looking and competing for workers. At such a time, it would not be unwise to ask for and attempt to implement an increase in minimum wage.

Presently, higher gas prices are complicating things for consumers, businesses, and small farmers who are struggling to survive. First, businesses increase their spending on gas, thus reducing their ability to reinvest, grow their business, and hire more workers. Second, consumers as already stated; are not spending enough to purchase goods and services to necessitate the hiring of more workers. The result is a continuing stagnating job market. This picture is prevalent in Jefferson City, the capital of Missouri where, even though it is not by any means the wealthiest part of the state, gas prices remain the highest at all times. People seem to blame it on collusion within the network of very few distributors.

Seen from these perspectives, implementation of minimum wage increase at this time, though an excellent idea, will lead to further uncertain job creation and increase in unemployment. As we have been hinting at since 2009, what we need is to seek a reduction in gas prices to spur job growth, especially since we are now exporting oil. It seems that as unemployment was said to fall to seven percent, gas prices began to rise again. Hopefully it is not meant to tap into income of additional workers to improve the ever-increasing wealth of speculators, leading to the continuous widening of income gaps in our society. This behavior will negate perceived increases in hiring, income, further job creation, and ultimately the much needed economic growth. Petroleum exporting countries are known to reduce gas prices for their citizens. The complaint in our case in the U.S. has been that we import oil. What do we say now when we are exporting oil because of alternative energy sources, such as natural gas usage in the fleet of vehicles in Los Angeles city transportation services? In conclusion, let us create jobs and lower minimum wage; else, it is the same minimum wage workers who will be the first to be laid off if businesses fail to pay their workers in the case of a minimum wage increase not preceded by a situation close to full employment of labor.