Deflation data point of the day

October 14, 2009

From AP: Colorado minimum wage to drop as living costs fall

Colorado will become the first state to reduce its minimum wage because of a falling cost of living.

The state Department of Labor and Employment ordered the wage down to $7.24 from $7.28. That’s lower than the federal minimum wage of $7.25, so most minimum wage workers would lose only 3 cents an hour.

Colorado is one of 10 states where the minimum wage is tied to inflation. The indexing is thought to protect low-wage workers from having flat wages as the cost of living goes up.

But because Colorado’s provision allows wage declines, the minimum wage will drop because of a falling consumer price index. It will be the first decrease in any state since the federal minimum wage law was passed in 1938.

It’s a small decline, so I don’t imagine this will have much of an impact on employment in the Rocky Mountain state. Nevertheless, falling prices can be very stimulative. And if they fall far enough, folks stop needing to go into debt to buy things. They can actually use cash(!)

Here’s a post from CR tonight regarding the euphoria in certain beaten down housing markets, Vegas and Southern Cal in particular. Note that a large number of transactions are financed with cash. Savings!

There’s a lot of economic virtue here. Falling prices clear markets. More transactions are happening and that means more folks are employed.

It may be the case that demand is artificially supported by the first time buyer tax credit, but I’m guessing low prices are a more important factor.

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Are you sure that the cash in this instance is really savings? I’m wondering if a lot of these houses aren’t being bought by large investor groups (with all cash) who are financed by the big banks who are in turn taking advantage of government guaranteed loans. It just seems fishy to me that the market would be going so nutso with all these cash buyers all of the sudden.

Posted by John | Report as abusive