Workers of America

The Minimum Wage

Low wage workers deserve another raise


Imagine trying to raise a family on $10,712 a year. That's the amount you'd earn if you worked for the current federal minimum wage of $5.15 an hour. Even for a single parent with only one child, that amount is $1,007 below the poverty level. (Last year, Congress approved a two-step raise from $4.25 to $5.15. The $5.15 rate became effective on September 1, 1997.)

A Brief History of the Minimum Wage

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. In urging passage of minimum wage legislation, Franklin Roosevelt stated:

Since 1938, the minimum wage has been raised 17 times, although the increases have been sporadic. Prior to last year's increase, the minimum wage had not been increased by Congress since 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 $5.15 per hour rate is more than three 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 primarily concerned with maximizing their profits. But beyond that, one of the most powerful arguments used [primarily by Republicans] to oppose minimum wage increases is that they cost jobs. Unfortunately, despite strong evidence to the contrary, 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 may seem to hold some valid logic, there is no evidence to indicate that in the "real world," an appreciable job loss will accompany moderate increases 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 in two states:

California, in 1988, increased the minimum wage from $3.35 to $4.25 per hour, an increase of 27% [the current Democratic proposal is for a 20% increase in the federal minimum wage].

New Jersey, in 1992, increased the minimum from $4.25 to $5.05, an increase of 19%.

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:

The increase in wages may motivate workers to take their jobs more seriously, to be more conscientious and motivated to be more productive.

The increase in wages helps to reduce turnover in the job market. With fewer job vacancies, overall employment is increased.

Today, the argument against minimum wage increases having an appreciable impact on employment is even stronger. In spite of a rise in the federal minimum wage of $.90 per hour over the past year, unemployment in October, 1997 was at its lowest rate (4.7 percent) since 1973.

Minimum Wage Workers Are Teens?

Another argument used to fight minimum wage increases 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 that more than two-thirds of minimum wage workers are 20 or older and 40 percent are the sole bread winners in the family. With the current push to move people on welfare into jobs, this percentage will undoubtably increase.

It is also reasonable 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.

Now Many Workers Would Benefit?

At the time that Congress approved the latest increase, it was estimated that just over two million workers were currently earning the minimum wage, with an additional 10 million earn between $4.25 and $5.15. Therefore, over 12 million workers would be expected to benefit directly by another increase approved by Congress. Lifting the minimum wage, however, is also expected to 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 any increase in the minimum wage.

A Question of Fairness and Dignity

The biggest pro favoring a further 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 in 1995, 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 many U.S. corporations continue to enjoy record earnings, American taxpayers were providing subsidies for their low wage workers through the Earned Income Tax Credit and food stamp programs.

Not only would corporate subsidies be reduced, but increases in the minimum wage increase tax revenues and pump billions of additional dollars into the Social Security and Medicare trust funds. The recent increase in the minimum wage is a significant contributor to the lowering of the federal deficit this year. Additionally, since low wage workers must spend most or all of what they earn just to survive, the wage increases are pumped directly back into and boost the economy.

With the increase to $5.15, an individual working full time under the minimum wage had their income raised to $10,712. That would have been enough to boost a single parent with one child above the 1995 official poverty line of $9,975. Unfortunately, the inflation that has occurred between the time the increase was first proposed in Congress and finally enacted has seen the poverty line increase to $11,719. For a four person family, a single earner at the minimum wage leaves their family more than $5000 below the poverty line.

Itís ironic, given the Republicansí fervor for cutting welfare, that they so strongly opposed an increase in the minimum wage. What better incentive to get people off welfare than a living wage. To move off welfare, single parents have to bear the costs of child care and transportation. In addition, most minimum wage jobs do not provide health care benefits.

Affordable Housing

One of the biggest impacts resulting in the recent 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, more than twice the new minimum wage of $5.15.

States and Cities Lead the Way

While gridlock in Congress has slowed increases in the federal minimum wage, some states have taken the lead and passed their own increases. Eleven states and the District of Columbia had set the minimum wage above the previous federal rate of $4.25 per hour rate. Leading the way were 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. And with the federal wage now raised to $5.15, more states are expected to follow with comparable increases.

Democratsí Proposal Only a Bandaid

Even with the approved increase that passed last year, the new minimum wage rate still leaves a single earner, four member household more than $5000 below the poverty line. In passing last year's increase, Congress made no provisions for any 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 fought hard for by the Democrats, while helpful, does not solve the problem for low income families struggling to survive, and leaves the wage gap vulnerable to further increases in inflation. The new minimum wage increase 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.

Summary

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 as a result of the recently approved increase in the federal minimum. Increases in the minimum wage could also squeeze some small businesses, who are operating at the 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 benefit directly from the increase to $5.15 far outweigh the possible effects of any resulting job loss. The increase also gives 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. Antoher raise in the minimum wage would also help 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 increases 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 income inequality continue, the United States will soon be little better than many Third World countries. Raising the minimum wage goes a long way to addressing the problem and raising the living standards of millions of American workers and their families.

Last updated: November 1997


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