The Eight-Year Wait For A Raise

July 24, 2009. 4.5 million workers across 31 states were greeted with an increase in the federal minimum wage to $7.25/hour. Signed by former President George W. Bush as part of the Fair Minimum Wage Act of 2007, it created $1.6 billion of increased wages for these families at a time in which the entire economy was in collapse. Three days ago marked the eight-year anniversary of the phase-in of the $7.25 minimum wage, but it was no day to celebrate. While some states have embraced higher statewide minimum wages, 21 states, including Texas, North Carolina, and Pennsylvania, have not – leaving about 40% of the population subject to a $7.25 minimum. Not only is this wage simply unlivable in this day and age (full-time minimum wage workers can’t even afford a 1-bedroom apartment), but it’s also paltry compared to historical minimum wages. Compared to its enactment in 2009, today’s minimum is only worth $6.37 (an erosion of 12.1%). The highest minimum wage in US history, inflation adjusted, was in 1968 when it was worth $10 in 2014 dollars. The fact that it’s been in decline since then serves as a testament to how life at the very bottom for Americans has decayed over the past half-century.

wage 1.jpgFor workers who earn the minimum wage and slightly above it, the chance for reform looks bleak. Republicans control both houses of Congress and the Presidency but have generally not shown much interest in raising the minimum wage. In fact, for many of them, they’d like to eliminate the minimum entirely. While states have at times taken up the cause for themselves and attempted to increase their own minimum wages, it’s often not been enough. The MIT Living Wage Calculator, which estimates how much a worker working full-time would need to earn to provide for their family (a “living wage”), shows that not a single state has a minimum wage that would fit this description. Indeed, states have increasingly begun to take the opposite stance. 27 states today have passed laws requiring cities to comply with the statewide minimum wage. In St. Louis, this meant that the minimum wage could drop from $10/hour to just $7.70. In Birmingham, their move to increase the minimum wage to $10.10 was blocked in less than 10 days by the Alabama state government. In Oklahoma City, the state government stymied their increase to $10.10/hour and then went further to preemptively quell any effort to grant paid sick leave (something that every nation in the world already guarantees except for the US and Papua New Guinea). Never mind that these decisions effectively nullify a city decision designed to help their most vulnerable workers – cities have higher living costs than states generally do as a whole, meaning those wage hikes are actually needed.

So why exactly is there so much pushback against an increase in the minimum wage? Don’t expect to find one among the American populace. A YouGov/Huffington Post survey in 2016 found majority support for an increase in the national minimum to $10.10 and $12 and a plurality for a $15 minimum. While support among Republicans for an increase was lower than for Democrats and Independents, a majority still supported an increase to $10.10. Indeed, the most opposition has been seen by policy makers (and less consistently, businesses). It’s worth examining their case since even if progressive activists may deride their views as heartless, many of the arguments they cite against an increase are based on verifiable facts and economic theory. Yet, at the same time, a minimum wage hike cannot be ignored as a policy that must be prioritized. A nationwide wage hike stands to benefit tens of millions of Americans, many of which simply cannot survive at their salaries they are provided today.

One argument that is cited by many politicians and think tanks against raising the minimum wage is that most individuals who actually do make it are teenagers. They are correct – of the 3.3 million Americans who earn at or below $7.25/hour (exemptions exist for disabled workers, businesses with less than $500,000 of income, teenagers under the age of 20, full-time students, tipped workers, etc.), 45% are ages 16 to 24 (as noted by the Pew Research Center). Opponents of raising the minimum wage are also very quick to point out that 64% of all workers falling in this category are part-time. But they’re missing the point. If the minimum wage is raised from, say, $7.25 to $9.00, it’s not just Americans earning $7.25/hour that are going to get increased earnings. In that situation, everyone earning between $7.25 and $9.00 will also get a raise. Moreover, as former President Bill Clinton notes, raising the minimum wage “bumps the wage structure everywhere…people who make the minimum wage or near it are struggling to get by, they spend every penny they make, they turn it over to the economy, they create jobs” – a phenomenon also known as the “ripple effect.” Indeed, the Economic Policy Institute estimated in 2015 that an increase in the national minimum wage to $12.00/hour over a five-year period would lead to 35 million low-income workers earning an additional $80 billion in income. Now it’s true that not all the benefits of a higher minimum would go to the poor – indeed, an increase in the minimum wage to $10.10/hour would give 29 percent of its benefits to families earning 3 times or more the poverty line. While it’s clearly not the best tool if the goal is wealth redistribution (government welfare programs are likely to have more ideal effects), it’s definitely better than staying idle and letting millions of workers toil in their plight. Additionally, there’s a lot of indicators that our poverty line is too low – the poverty line is far lower than the living wage thresholds that the aforementioned MIT Living Wage Calculator identifies across the country (in fact, almost all statewide averages are over twice the poverty line). Also, it’s worth noting that the Affordable Care Act doles out subsidies to those earning up to 4 times the poverty line (and the proposed BCRA 350%), a clear omission that the poverty line may not be an ideal measurement since it doesn’t even account for health care expenses.

wage 2.jpgAn argument that is used far more frequently, however, is that minimum wage hikes are job-killers. Neoclassical economics dictates that if businesses increase their labor costs (as would inevitably happen if they have to pay more to workers), then they’re likely to either shed jobs or increase prices. Obviously, this is a concern – businesses are committed to maximizing their profit margins. As a result, any minimum wage hike debate must be accompanied by a cost-benefit analysis: at what point can you raise the minimum wage without harming the overall income of low-wage workers? If the federal minimum is increased to, say, $7.26, it’s doubtful there would be any job losses. If it’s risen to something absurd like $50, obviously the employment effects would be so catastrophic that any such policy would be ridiculous to even suggest. Academic research, fortunately, generally supports the cause for a minimum wage hike, noting that modest increases in the minimum wage do not affect employment. In 2014, the CBO estimated that an increase in the federal minimum wage to $10.10/hour would lead to a decrease in employment by approximately 0.3% (slightly larger than the monthly changes we see in our unemployment rate), but even accounting for that and increases in prices, overall real income for everyone would still increase by $2 billion, taking 900,000 net Americans out of poverty. This means that Americans as a whole benefit from an increase in the federal minimum to $10.10 (primarily those below and slightly above the poverty line). It’s worth remembering that there are limits, however. A hotly debated University of Washington study estimates that low-income workers may have lost a net $125 per month due to layoffs and increased prices outweighing their wage gains when Seattle raised their minimum wage to $13/hour. While the study’s findings are preliminary and have yet to be peer reviewed, it is worth noting there are limits to where we can see gains. Even then, $13 is almost twice as high as the current federal minimum, and an increase to that level wouldn’t be considered a modest one or even ideal for many low-cost areas in the United States.

At the end of the day, America’s most distressed workers need a raise. With a booming economy with a streak of 81 consecutive months of job creation (the longest on record) and a 4.4% unemployment rate, there’s never been a better time for businesses to be able to absorb any costs of giving one. The United States promised in the Constitution’s Preamble to “promote the general welfare” – it’s time we got around to doing just that.

3 thoughts on “The Eight-Year Wait For A Raise

  1. Great article! My two cents: Here in California, statewide legislation was recently passed to raise the minimum wage to $15 over the course of the next decade. That’s really good for low-income workers in the Bay Area/Silicon Valley, because housing costs have skyrocketed, and continue to rise, thanks to a growing high-income population. A $15 minimum wage is pretty much necessary here. Like you pointed out, there’s a similar situation taking place in cities all over the country, and cities definitely should be allowed to raise the minimum wage in their own jurisdictions. But these minimum wage increases reflect a rise in living costs, which fluctuate much more in cities than rural areas. It seems like a federal increase to $13/hour would mess with local businesses in rural areas across the country. Employers would pass the cost along to customers, who in turn would need their own wages adjusted to reflect the increased cost of good and services… it would just be slow, drawn-out inflation. I’ve seen some studies suggesting a more flexible, indexed minimum wage, that rises and falls on a local level depending on a variety of factors, which seems like a better idea than some cookie-cutter wage like we have now. Either way, excellent article. Minimum wage is a fun topic.

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    1. Thanks! It’s kind of funny how in even some areas, $15 isn’t enough in California (the San Francisco-Oakland-Hayward area apparently needs $16.01 –
      http://livingwage.mit.edu/metros/41860). I mostly included the example of $13/hour because it was what Seattle just did, and therefore had research upon it. Since >$10 minimum wage floors are rarely studied, it was one of the few I could find in which there was an upper bound on where minimum wage benefits could be found. I’m with you when you say that it would probably cause some issues with local businesses – a $13 wage in 2017 dollars would be quite difficult in low-cost areas like Arkansas and Mississippi. Regarding the fluctuating minimum wage, I’ve actually read about and liked the idea too, except I don’t think it’s fully usable in the real world because if the minimum wage ends up going down and businesses actually react to that, some workers are going to be really angry. Overall, an ideal minimum would probably be something higher than $10.31 in 2017 dollars (roughly equal to $10.10 in 2016 dollars that the CBO studied) and something below $13 at a national level. A $15 minimum by 2022 might fit the bill – I’d really like to see some studies on it.

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