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
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.
VIVIAN J. PAIGE | All Politics is Local 
Vivian,
Excellent piece. The links help the story. I listened to a long story on this topic recently on NPR. Yours is better.
— Terry
Very interesting, Vivian. It’s really great to hear that at least some people are willing to look at all sides of this issue, as opposed to being a screaming whacktivist, proclaiming from the rooftops that those who don’t advocate a straight up, plain old increase of minimum wage are RACIST AND REPUBLICAN AND EVIL AND TARGETING THE POOR. I recall trying to explain the classic “world without minimum wage” thought experiment which shows in extreme form what wage laws do to one young man in particular; you would have thought that I had just morphed into Hitler before his very eyes from the look on his face! No, I wasn’t advocating no wage laws, the experiment shows in extreme form to make its point painfully obvious; it’s popular to use in 100 level courses because of that.
If you want to hear more from the economics-geek side of things, I”ve got a bunch of Economics blogs linked to on Monstrosity. Don Bordreaux of Cafe Hayek is particulary fascinated with minimum wage law of late.
I find it most interesting that you quote Rustici; I intended on taking an Econ course with him in the fall, but the class was full already two days after registration began. To say the man is a popular professor is an understatement! Tough as hell, but very popuar and very good- for we know that not all which is popular is very good; Rustici however, embodies both.
Nice job Vivian this proves another point about the bloggersphere. Intelligent blogging takes TIME. Basically, it takes time to do reserach to backup what you have to say. Thanks for linking the info. Also, imagine trying to put this line of thinking into a bumper sticker or a soundbyte.
I have one additional comment on the issue at hand. Do people stay at the minimum wage level for long periods? I am assuming that most individuals would receive a raise in a short time period. This is why I view the minimum wage as a price floor or starting point that people move up from and generally do not agree with increasing it for most of the classis reasons. When people compare the minimum wage with cost of living I think the argument is flawed because the wage is a temporary starting point. I do favor a slight increase in the minimum wage due to inflation however.
I smile when reading your lower minimum wages for younger worker comment. Nothing is as simple as it seems. Death to bumper sticker soundbyte rhetoric 🙂
Melissa – I’m quite familiar with Don Bordreaux of Cafe Hayek; as a matter of fact, it was reading that blog that got me interested in doing this piece.
And presenting more than one side of an issue is something I take quite seriously. Very few situations are clearcut – and the minimum wage issue is certainly proof of that.
novamiddleman – you are correct about the time it takes. I started researching this about two weeks ago and writing it took several days. I actually stopped last night and wondered how people write on a deadline 🙂
As far as people staying at the minimum wage level – if the reduction in minimum wage wworkers from 2004 to 2005 can be used as an indicator, then it would appear that people do move up to a certain extent. However, I think that there are some folks who stay there – restaurant workers come to mind here.
Terry – as always – thanks! I value your opinion.
About your “automatic increases” idea.
Guess who opposes it? The Democrats, who want to make sure they can vote on every little increase and get the credit for it.
Insider – the D’s are not in control so your point is moot. If the R’s wanted automatic increases, they have the votes to do so. I think we can safely blame both parties for the mess they have made of the minimum wage issue.
I credit the Republicans for keeping the minimum wage from increasing since the last raise. The economy is the strongest, and everyone benefits, when the free market is allowed to work. Those willing to do for themselves will be the most rewarded. Minimum wage supporters are actually hurting the very people they are trying to help whenever the minimum wage is increased. A business may absorb some of the costs of a higher minimum wage, but they won’t support the whole cost. They can’t, because their competitors sure wont. The result is less jobs for those workers. This may be convenient for Dems, who can then point to R’s and go “see, see what meanies they are!! they hate the poor. Vote for us!.” I never hear national D’s telling their voters that if they work hard, they can move ahead, as I hear R’s do.
Sorry for the long post. I did not realize I wrote so much.
http://hrconservative.blogspot.com
If the economy was so strong, inflation would not have eroded the purchasing power of the minimum wage. The fact that it is at its lowest in 51 years should say something about the strength of our economy.
Vivian, you said yourself that only 2.5% of HOURLY workers (not even all workers) make minimum wage and about half of that are under 25, lots are part time, and many have tip income that far exceed 5.15/hr .
That tells you all you need to know about why this isn’t a big issue. Hardly anyone makes minimum wage.
It is a big issue to the nearly 1.9 million people who earn it. And it’s a big issue to politicians; otherwise, we wouldn’t even be talking about it.
I didn’t say that the tip income far exceeds minimum wage. I said that the minimum wage of waitstaff (and I’m being specific here because it doesn’t apply to all restaurant employees, such as dishwashers & busboys) is only $2.13 and that tips are supposed to make up the difference to bring them up to the $5.15.
1.9 million out of 295 million Americans. That’s not a political earthquake in the making…that’s a rounding error. Again, half of thatthat 1.9 are high school and college-age folks.
Of course it’s important to them. But the fact that its such a small percentage is the reason its not a hot, burning issue to anyone except those who want to make some political hay.
How would you respond to the position that expanding the Earned Income Tax Credit would be a much more effective and equitable way of helping the working poor than raising the minimum wage?
This is what I posted on your blog:
Let me mention one aspect of the EITC that you may or may not be aware of: the advanced EITC. This allows employees who anticipate qualifying for the EITC at year end to receive a portion of the credit during the year as a part of their paychecks.
Few people are aware this option exists and even fewer take advantage of it. Why? Because the largest employers are small businesses who have no clue the option exists or, if they do, don’t want to mess with it.
As to your issue: while I believe an increase in the EITC is an easier path, I don’t believe it is as effective. Since the large majority of EITC recipients receive the money in the form of a lump sum payment in April, this does not help them attain a higher standard of living during the year. Increasing the minimum wage accomplishes that.
Hello again, Vivian. I was, in fact, aware that EITC benefits could be distributed monthly, but the link to the advanced EITC was very helpful because I did not know about the name of that particular program feature. Thank you very much.
I think we can find common ground in the conclusion that ignorance of the EITC as well as ignorance of the advanced EITC is a serious problem, which is exactly why I have been trying to bring the EITC to the attention of those who advocate an increase in the minimum wage. One of my more recent blog posts addresses this issue directly. To wit, Why is the Earned Income Tax Credit Such a Well Kept Secret?
I pull my previous comment, and sort of agree with your solution 🙂