Here’s an unhappy observation about the minimum wage: Congress last increased the rate in stages in 2007, topping it out at $7.25 an hour in 2009, or $15,080 a year.
That amount, when adjusted for inflation, is actually lower than what a minimum-wage worker earned in 1968 and is too meager to offer anyone the chance to climb out of poverty, let alone afford basic goods and services.
About 10 states are now considering raising the rate, and Senator Tom Harkin, an Iowa Democrat, is proposing to increase the federal rate in three increments to $9.80 an hour in 2014. Many of the initiatives under consideration would smartly tie the minimum wage to the cost of living, meaning that those workers’ wages would finally keep up with inflation.
The past recession was brutal on jobs, household wealth and economic growth. But wages were hit hard, too. Real average hourly earnings have fallen below the level of 2009. Although wages often lag job growth after a recession, the pace of income gains this time around is far slower than in previous recoveries.
It’s also becoming clear that many Americans are being forced to take lower-paying jobs and that a low-wage bias is creeping into the economy, as Bloomberg economist Joseph Brusuelas recently put it. In many cases, minimum-wage work is all that’s available, which may explain why such workers are older and better-educated than they were three decades ago. In 2010, nearly 44 percent of minimum-wage workers had either attended or graduated from college, up from 25.2 percent in 1979, according to the Center for Economic and Policy Research, a liberal think tank.
Raising the minimum wage won’t entirely solve the problem of anemic incomes, but it would help. Economists have long found that boosting the minimum wage can raise income levels for those earning just above the minimum. Employers, seeking to protect “wage ladders,” often bump up salaries for slightly higher-paid employees, too.
This is one of many reasons that critics, including business groups like the U.S. Chamber of Commerce, the National Restaurant Association and many Republicans, oppose minimum-wage increases. The argument is that it will hurt the very people it was meant to help by forcing employers to cut jobs, raise prices or both. They point to studies that minimum-wage increases hurt teenagers, because young workers typically get minimum-wage jobs, which become scarce when employers are forced to raise salaries.
But a wave of new economic research is disproving those arguments about job losses and youth employment. Previous studies tended not to control for regional economic trends that were already affecting employment levels, such as a manufacturing-dependent state that was shedding jobs. The new research looks at micro-level employment patterns for a more accurate employment picture.
The studies find minimum-wage increases even provide an economic boost, albeit a small one, as strapped workers immediately spend their raises. A 2011 paper by economists at the Federal Reserve Bank of Chicago found that a $1 minimum-wage increase lifts household income by about $250 and increases spending by about $700 a quarter in the following year. The spending increase is driven by a small number of households that primarily buy vehicles.
No Employment Effects
A team of economists, led by Arindrajit Dube of the University of Massachusetts-Amherst, compared employment levels in contiguous areas with disparate minimum-wage levels over a 16-year period and concluded in a 2010 paper there are “strong earnings effects and no employment effects of minimum wage increases.”
The federal minimum wage was always meant to be a floor, not a ceiling. Today, someone earning the minimum would have to work 749 hours to afford one year of health insurance premiums and 923 hours to afford a year’s tuition at a public four-year college.
Although this math may not be persuasive in Washington, it does seem to be influencing legislatures across the country. Let us hope that states lead the way on the minimum wage, and that they tie increases to the cost of living, making endless rounds of legislation unnecessary. Then let us hope that fresh research and improved lives built on hard work compel Congress to follow.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.