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A look at the minimum wage

Democrats have made increasing the minimum wage an issue for the fall campaign season. The federal minimum wage is $5.15 per hour, and has not increased since 1997. Now, GOP members of the House are saying that they may have to vote on this issue soon.

Seventeen states have minimum wage laws in excess of the federal law, one – Kansas – has a minimum wage law less than the federal and six have no minimum wage laws at all. The large majority of the states follow federal law. Critics of a minimum wage increase say that it will cost jobs. Supporters say the erosion of purchasing power over nearly a decade means that we are beyond needing to increase it.

The truth lies somewhere in between.

Who earns the minimum wage?

According to the Bureau of Labor Statistics, for 2005, 2.5% of those paid hourly aged 16 or older earn at or below the minimum wage. About 47% of the 1,882,000 workers are 25 or older, with women outnumbering men by nearly two to one. Better than 80% of them are white. Approximately 60% of them are working part-time.

Minimum-wage or less workers are located throughout the country, but the South has the largest share: more than 43% of them live in Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West Virginia. Approximately 60,000 live in Virginia.

Most of those earning minimum wage or less are employed in service industries – nearly 75%. Of these, over 80% are employed in “food preparation and serving related occupations.” This actually explains the “or less” portion of the calculation: waitstaff has a minimum wage of $2.13 per hour, and are to make up the difference to the federal hourly minimum in tips.

The number of people earning minimum wage or less has actually decreased since 2004. Unfortunately, that has not been the case in the South, and particularly in Virginia, where the number of people earning the minimum or less has increased by 18,000.

Increase = job loss?

The biggest argument against increasing the minimum wage is that it will cost jobs. But will it? Economists have been saying so for years. In a 1985 article for the Cato Journal, Thomas Rustici makes a convincing argument that it does. He believes, in fact, that the jobs lost are those of the very people increases in the minimum wage are hoping to help.

On the other side is a 1994 study written by David Card and Alan B. Krueger. Entitled “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania,” the study looked at 410 fast food restaurants in New Jersey and Pennsylvania at a time when New Jersey increased its minimum wage while Pennsylvania’s remained unchanged. The authors found no evidence that an increase in the minimum wage reduced employment.

The Economic Policy Institute has some information on minimum wage and specifically states:

There is no evidence of job loss from the last minimum wage increase.

  • A 1998 EPI study failed to find any systematic, significant job loss associated with the 1996-97 minimum wage increase. In fact, following the most recent increase in the minimum wage in 1996-97, the low-wage labor market performed better than it had in decades (e.g., lower unemployment rates, increased average hourly wages, increased family income, decreased poverty rates).
  • Studies of the 1990-91 federal minimum wage increase, as well as studies by David Card and Alan Krueger of several state minimum wage increases, also found no measurable negative impact on employment.
  • New economic models that look specifically at low-wage labor markets help explain why there is little evidence of job loss associated with minimum wage increases. These models recognize that employers may be able to absorb some of the costs of a wage increase through higher productivity, lower recruiting and training costs, decreased absenteeism, and increased worker morale.
  • A recent Fiscal Policy Institute (FPI) study of state minimum wages found no evidence of negative employment effects on small businesses.

In June 2004, the city of Sana Fe became the third city in the U.S. to institute a citywide minimum wage that applies to private businesses with 25 or more employees. Supporters of the measure hail it as a great success. The Employment Policy Institute disagrees, saying:

This paper finds that Santa Fe’s living wage increase led to significant and negative consequences for employees in the city-particularly the least skilled employees. The increased likelihood of unemployment and a decreased number of hours worked were all highest for low-skill employees. Furthermore, there is significant evidence to suggest the displacement of adult employees by unmarried high school age employees.

Erosion of purchasing power

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There is no argument about the erosion of purchasing power for the current minimum wage. It is at its lowest level since 1955. The longer the time between increases, the greater the reduction in purchasing power. (Chart source: EPI. Click to enlarge.)

My thoughts

Nothing in this life is free. As the result, I believe that an increase in the minimum wage cannot possibly be cost-free. My own experience as a practicing CPA is that increasing costs of employees will have a negative effect on the bottom line of any company and the company will do whatever is appropriate to deal with those costs. Options include passing the costs on to customers in the form of higher prices, reducing the number of hours worked, and reducing the number of employees. So the fiscal conservative in me says that an increase in the minimum wage is not the best answer.

On the other hand, few can live on $206 a week – $10,712 a year – before taxes. Regardless of the cost of living, that figure is barely above the federal poverty guideline for 2006 of $9,800 (single) and far below the Federal TRIO guideline (used for determining eligibility for various government programs). The social liberal in me says that in this great country of ours, people should be paid a wage that allows them to live.

So I am torn on this issue. Without the ability to make a profit, businesses will not be able to hire employees. But without a reasonable wage, employees will not be able to live.

If I had to vote on the issue today, I would vote in favor of increasing the minimum wage, primarily because the group of people earning it is small enough – 2.5% of the hourly employee work force – that it cannot have a dramatic impact on the economy.

Further, I would propose that an increase in the minimum wage include the following:

  • Automatic inflation adjustments to the minimum wage. To help prevent the erosion of purchasing power, the minimum wage should be adjusted annually for inflation. A number of items are already so adjusted, including federal income tax brackets and deductions for exemptions, Social Security benefits, and military retirement benefits. In doing so, this virtually eliminates the politically-driven process of increasing the minimum wage.
  • Lower minimum wage for younger workers. The argument for paying workers who have few financial responsibilities other than buying the latest iPod is strong. Precedent for paying a lower minimum wage to a group of employees already exists in the $2.13 per hour minimum paid to waitstaff in restaurants. The downside to this proposal is the possibility of employers replacing older workers with younger ones. The answer to that may lie in the giving of a tax credit to employers who continue to employ older workers at the higher minimum, something akin to the tip credit that restaurant employers enjoy.
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21 thoughts on “A look at the minimum wage

  1. I guess I missed this whole line last year. Your analysis is very good, but I question you solutions. In you analysis, you believe that businesses will raise prices to deal with an increase in minimum wage, but then you want to index the minimum wage to inflation. How will that not create an inflationary spiral?

    The other part of your proposal is to pay young workers less. You admit that this might cause employers to hire younger workers in place of older ones, but the real admission here is that the work is not worth the money the employer is being required to pay! Furthermore, you want a tax subsidy to keep the older workers, so rather than paying for the minimum wage in inflation, you’d do it by increasing taxes.

  2. 1. The number of people who make minimum wage is too small to have an effect on inflation.
    2. Increasing taxes? How so? As usual, you know not of what you speak. Are you familiar with the tip tax credit? Are you familiar with all of the other employment-related tax credits that incentivize businesses to hire certain classes of workers?

  3. 1. It’s not just those who make minimum wage, but those near it, too, whose wages would also need to be increased.

    2. You’re right. We can just go further into debt, rather than raising taxes.

  4. I’m a little late to this party. I am too lazy to look it up, but there are numerous studies showing the stimulative effect of increasing the minimum wage. All that money will go right back into the economy in the form of increased purchasing power.

    Moreoever, there are many businesses which make a practice of paying one or two dollars above the minimum wage, so all those workers will also get a raise.

    This is a very good thing.

  5. I have seen no such studies, but would be interested if you have them.

    As for the money’s “going back into the economiy,” that’s what businesses do with the money, too.

  6. i’m a libertarian and it’s a mean business. lol. excercise those rights people

    [audio src="http://www.mises.org/multimedia/mp3/block/block3.mp3" /]

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