The Minimum Wage

Why it needs to be increased

The following is an edited version of the article originally published in the Summer 1996 issue of Working People.

Imagine trying to raise a family on $8,840 a year. Thatís the amount youíd earn if you worked for the current federal minimum wage of $4.25 an hour. Even for a single parent with only one child, that amount is $1,135 below the poverty level.

With workersí high anxiety over wages, benefits and job security, the battle between the Democrats, who want an increase in the minimum wage, and the Republicans, who oppose it, is rapidly becoming a major issue in this yearís presidential and congressional campaigns. Why is it just now becoming such a popular issue when there hasnít been an increase since 1991?

The Democrats are focusing on the minimum wage because itís an issue thatís easy to understand, has a high impact on a large number of Americans, and symbolizes the increasing disparity in worker income. The Democrats, in what may turn out to be the masterstroke of the 1996 campaign, are hoping to use Republican opposition to a minimum wage increase to drive a wedge between Republican candidates and mainstream voters, who overwhelmingly support an increase by more than 4 to 1.

A Brief History

The minimum wage was originally established by the Fair Labor Standards Act of 1938, which set the minimum at $.25 per hour. The intent of Congress in establishing a wage floor was to provide for "the maintenance of the minimum standard of living necessary for health, efficiency and general well-being of workers." At the time, of course, the United States was in the middle of the Great Depression; unemployment was high and wages extremely low. The minimum wage was aimed at preventing employers from exploiting workers in a job-scarce economy.

Since 1938, the minimum wage has been raised 17 times, although the increases have been sporadic. The last increase passed by Congress was in 1991. Because there is no automatic provision to adjust the minimum wage for inflation, its purchasing value has fluctuated wildly over the years. The minimum wage reached its peak value in 1968, when it was raised to $1.60 per hour. Although todayís $4.25 per hour rate is more than two and a half times the 1968 amount, todayís minimum wage buys nearly 40 percent less than it did in 1968.

Increase in Minimum Means Lost Jobs?

Why would anyone want to oppose an increase in wages for low income workers? Well, business people, of course, who are only concerned with maximizing their profits. But beyond that, one of the most powerful arguments being used [primarily by Republicans] to oppose a minimum wage increase is that it costs jobs. In fact, many economists support this notion.

The theory is that in deciding to hire, employers must consider the cost in wages and benefits vs. the potential revenue, or value added, to be generated by hiring or retaining an employee. As wages increase, the difference between the two decreases. At some point, the cost of hiring or retaining an employee is greater than the revenue generated, at which point the job is lost.

The reality, however, is that while the theory is logical, there is no evidence to indicate that in the "real world," an appreciable job loss will accompany a moderate increase in the minimum wage. In the past few years, David Card and Alan Krueger of Princeton did a study to test the job loss theory. They looked at increases in the minimum wage implemented recently in two states:

Card and Krueger were expecting to find that employment rates for low wage workers in California and New Jersey had dropped after the increase in relation to surrounding states which did not raise their minimum wages. In both cases, however, the unemployment rates in California and New Jersey were the same or lower than in the surrounding states.

Why didnít unemployment increase with an increase in the minimum wage? Card and Krueger offered a few explanations which may help to explain what happened:

Minimum Wage Workers Are Teens

Another argument being used to fight a minimum wage increase is that most minimum wage workers are teens who come from affluent families and use their money to buy a car and pay the insurance. The fact is, however, that more than two-thirds of minimum wage workers are 20 or older and 40 percent are the sole bread winners in the family.

It is also a reasonable assumption that if the minimum wage is increased, the percentage of teens working minimum wage jobs would decrease. Thatís because with an increase, more adults would view those jobs as worthwhile and would subsequently compete more often for them.

How Many Workers Would Benefit?

Just over two million workers earn the minimum wage, but an additional 10 million earn between $4.25 and $5.15. Therefore, over 12 million workers would benefit directly if the increase proposed by President Clinton and congressional Democrats is approved. Lifting the minimum wage, however would also benefit millions more workers earning above the new $5.15 level. Thatís because many employers would have to adjust their pay scales upward to account for the increase in the minimum wage.

A Question of Fairness and Dignity

The biggest pro favoring an increase in the minimum wage is basic fairness and the need to lift families out of poverty. A recent survey found that the pay of chief executives at major U.S. corporations jumped 31 percent last year, putting their median salary at $5 million. Some of those corporations employ workers at or near the minimum wage who canít afford lifeís basic necessities. While U.S. corporations enjoyed record earnings last year, American taxpayers were providing subsidies for their low wage workers through the Earned Income Tax Credit and food stamp programs.

Not only could corporate subsidies be reduced, but an increase in the minimum wage would increase tax revenues and would pump billions of additional dollars into the Social Security and Medicare trust funds. And since low wage workers must spend most or all of what they earn, the wage increase would be pumped back into and boost the economy.

If the increase to $5.15 is approved, an individual working full time would see their income raised to $10,712. Thatís enough to boost a single parent with one child above the official poverty line of $9,975. Three and four member families, however, would still be below the poverty line with a single earner working full time at the minimum wage.

Itís also ironic, given the Republicansí fervor for cutting welfare, that they so strongly oppose an increase in the minimum wage. What better incentive to get people off welfare than to offer a living wage. To move off welfare, single parents have to bear the costs for child care and transportation. In addition, most minimum wage jobs do not provide health care benefits. An increase in the minimum wage would help welfare recipients cope with the increased costs associated with the loss of welfare benefits when they take a job.

Affordable Housing

One of the biggest impacts in the decline in value of the minimum wage, and the stagnation of wages in general, is in the ability of families to afford housing. In a recent study called "Out of Reach," the National Low Income Housing Coalition found that "households with one minimum wage worker, working full-time all year, cannot afford...a one bedroom household in any metropolitan area anywhere in the nation." Even more striking for families, the report found that "the median hourly wage needed to afford a two bedroom unit is $10.44, far in excess of the current federal minimum wage of $4.25 and [more than] twice the proposed minimum wage of $5.10."

States and Cities Lead the Way

While gridlock in Congress continues to stall a proposed increase in the federal minimum wage, some states have taken the lead and passed their own increases. Currently eleven states and the District of Columbia have set the minimum wage above the federal $4.25 per hour rate. Leading the way are Hawaii and the District of Columbia, at $5.25, followed by New Jersey at $5.05. At least a dozen other states are considering increases.

Democratsí Proposal Only a Bandaid

Should the proposed increase be approved this year, the full $5.15 would not be effective until 1998. But even if the full increase were effective now, the new wage would still leave a single earner, four member household nearly $5000 below the poverty line. In addition, the Democratís proposal does not include a provision for future increases, either linked to increases in the cost of living or, as proposed by the AFL-CIO, to an increase in average hourly earnings.

As a result, the increase proposed by the Democrats, while helpful, does not solve the problem for low income families struggling to survive and leaves the wage gap vulnerable to increases resulting from future inflation.

The Democratsí proposal also fails to address the need for health care, provided to families on welfare but not to most low wage workers. The United States is the only major industrialized country that does not provide at least basic health care coverage to all of its workers and their families. Itís blatantly unfair for low wage workers to be taxed to pay Medicare for the elderly when they, themselves are denied health care coverage.


Even the most optimistic supporters would have to concede that increasing the minimum wage is not strictly a win-win situation. Although recent studies indicate that there has been no noticeable increase in unemployment associated with recent minimum wage increases, there may in fact be some jobs lost if an increase in the federal minimum is approved. An increase in the minimum wage could also squeeze some small businesses, who are operating at margins in highly competitive markets.

But the benefits of increasing the federal minimum wage far outweigh any negative affects that might result. The 12 million workers that would benefit directly from an increase to $5.15 would far outweigh the effects of any resulting job loss. The increase would also give added incentive for those on welfare to join the rolls of the employed, a result that should be welcomed by members of both major political parties and would certainly benefit the nation as a whole.

Raising the minimum wage would also begin to address the widening gap in incomes between rich and poor, a trend which began in the late 60s. According to a recent report from the Census Bureau, while the top one-fifth of households saw their incomes increase 20% between 1984 and 1994 (adjusted for inflation), the middle fifth gained just 1% and the bottom fifth dropped 3%. While the rhetoric against an increase in the minimum wage is based on the impact of jobs lost, the real impact is a transfer of wealth to lower and middle income families and a bolstering of the now-shrinking middle class. If the current trends in inequality continue, the United States will soon be little better than many of the Third World countries Americans often disdain. Raising the minimum wage will go a long way toward addressing the problem and raising the living standards of millions of American workers and their families above the poverty line.