Should the United States government raise the federal minimum wage?
The minimum wage has long been considered a fundamental right of the labor force in the United States. It ensures that every individual who works full-time can earn a minimum wage dictated by the federal or state government instead of by their employer, in order to meet basic standards of living. In 1938, under the Franklin D. Roosevelt administration, Congress established a federal minimum wage for the first time through the Fair Labor Standards Act. This set the wage at $0.25 per hour ($4.53 in 2019 dollars), which was raised to $0.75 ($8.06) 11 years later. By 1968, the minimum wage had gradually increased to $1.60, or $11.53 in 2019 dollars (Kiger, 2019). This was the highest purchasing power that the federal minimum wage has ever had, at least as of March 2020, partially because it ceased to be indexed to inflation after 1968. This means that the minimum wage no longer changes with the value of the dollar in every state. The federal government raised it to $7.25 ($8.74) in 2009, where it remains today. However, states have the power to set their minimum wage, and many have done just that. A majority of states (29) have higher minimum wages than the federal one. For example, the minimum wages in New York and California are going to be increased to $15 per hour by 2024 (Kiger, 2019). And in 17 states, the minimum wage is still indexed to inflation.
However, the federal minimum wage is no longer fully serving its original purpose. It was designed to ensure all Americans were able to afford the necessities of modern life: housing, food, clothing, medical expenses, etc. But researchers at the Economic Policy Institute (EPI) project that by 2024, a single adult with no children will need at least $15 an hour if they are working full-time to have a “modest but adequate” standard of living. This is defined as only being able to cover necessities, not allowing any leftover money for savings, etc. And single adults or even couples will not be able to sustain this level if they have kids: per the EPI’s estimates, even a $15 minimum wage for two full-time working adults with two children will not be enough to cover basic requirements in any area of the country (Zipperer, 2019). But 25% of all American workers in 2018 earned $13 or less per hour, and many are surviving on the federal minimum of $7.25 an hour.
For years economists and politicians alike have argued about whether raising the minimum wage is beneficial or harmful to the economy. In 2016, according to polls from the Pew Research Center, Gallup, and CBS News, 7 out of 10 Americans and over 50% of Republicans supported raising the minimum wage (WH report, 2016). Many governors and state legislatures have responded to this public sentiment by independently raising their state minimum wages since then. However, 72% of economists who responded to an Employment Policies Institute survey opposed a $15 minimum wage, a majority of self-identified Republican economists preferred $7.50 or less, and a plurality of Democrats preferred $10.00 to $10.50 (Phelan, 2019). Given that a $15 minimum wage is the most frequently proposed option, such as in the Raise the Wage Act introduced to Congress in 2019, these findings suggest that even liberal economists would be highly opposed to the most popular changes in minimum wage level. So, should the federal government significantly raise the minimum wage, and would this help low-income workers and the problem of income inequality in the United States?
The demographics of minimum wage workers are an important issue to consider when answering this question. Many people think that most low-wage employees are teenagers with low levels of education, but this turns out not to be true. According to Ben Zipperer, an economist at the Economic Policy Institute, if the minimum wage was increased to $15 by 2024, 91% of those who would see wage increases would be at least 20 years old, 68% would be at least 25, and the average age of those affected would be 35 years old. Additionally, 44% of all minimum wage workers have some college experience. Women would compose 56% of the population benefiting from a minimum wage increase, although they are only 48% of the workforce, and 38% of black workers and 33% of Hispanic workers would receive wage increases under this hypothetical (Zipperer, 2019). (EPI, 2019).
Several studies have demonstrated that increasing the minimum wage can help bring large numbers of people out of poverty and provide a boost for the overall economy as well. According to an official report from the office of President Obama published in 2016, an increase in the minimum wage could bring 4.6 million people or more out of poverty. The report cites various benefits of employees receiving higher pay, such as increased productivity, greater motivation, and reduced turnover. Additionally, low-wage workers would spend the additional money they received, and thus overall economic growth would increase. Arindrajit Dube, who is a professor of economics at the University of Massachusetts, Amherst, states that families at the bottom of the income distribution will benefit from a higher minimum wage. Analyzing economic data from 1984 to 2013, he demonstrates that minimum wage increases stimulate significant positive economic effects for those in the bottom 20%, especially those at the 10th and 15th percentiles (Dube, 2017). This means the families’ incomes are increased, and as a result, many Americans are brought out of poverty. This is consistent with the findings of other papers that state that large increases in the minimum wage have positive effects on wage growth (Lopresti, Mumford, 2016). It turns out that even those slightly above the minimum wage can benefit from wage increases. This is known as the spillover effect, and researchers have found evidence suggesting those earning 20-30% above the minimum see wage growth as a result of minimum wage hikes (Neumark, Wascher, 2008).
As discussed earlier, Americans with children are simply not able to cover necessities with only one job when they earn $7.25 per hour, and those without kids are still not earning enough from the federal minimum wage to live comfortably. This has a significant effect on the poverty level in this country: there would be 6.2 million fewer people living in poverty if the United States had enacted just a $12 minimum wage in 2018 (Zipperer, 2019). Research has shown that living in poverty is extremely harmful to individuals’ health and overall well-being (for a detailed description of this, see the “Why Focus On Social Mobility” page). A fundamental role for the federal government is to minimize the number of people that are struggling to survive and thus experiencing these negative effects of poverty. Yet according to the research presented above, the government has the power to assist many people in poverty by raising the minimum wage but has not done so since 2009.
Meanwhile, many economists believe increases in the minimum wage would be harmful to the American economy, and even to the low-wage workers that it is intended to help. A majority of economists surveyed believe that higher minimum wages would make it difficult for corporations with fewer than 50 people to stay in business and that they would increase the skill levels of workers in entry-level jobs, making it harder to be qualified for those positions. Only 5% of economists thought that raising the minimum wage is an effective tool to address the needs of poor families (Phelan, 2019). This is partially because many individuals that are in poverty are unemployed to begin with and cannot benefit from minimum wage increases, in addition to the fact that almost 50% of poor American workers already earn more than $10.10 per hour (Sabia, 2015). And per the U.S. Bureau of Labor Statistics (BLS), only 2% of all workers in the United States who are paid by the hour earned the federal minimum wage or less, way down from 1980, when this figure was 13% (BLS, 2018). So there is a case to be made that raising the minimum wage will just not affect enough people to really aid Americans in poverty.
Furthermore, with higher minimum wages comes a lower quantity of labor demanded, and thus people will be laid off from their jobs. In a review of literature related to the economic effects of the minimum wage, conducted by David Neumark and William Wascher, two-thirds of researchers’ studies showed evidence of negative employment effects, while only about 8% showed positive effects. Moreover, goods and services associated with low-skilled, low-wage labor will have higher prices as a result of higher minimum wages (Neumark, Wascher, 2008). Essentially, these authors contend that the hikes will not have significant positive effects for low-income Americans, while they will harm consumers purchasing goods or services produced by low-wage workers. A large reason why Neumark and Wascher reach a different conclusion than the Obama administration and Dube is that they take into account the fact that even if individuals in poverty can benefit from minimum wage increases, there is a decent chance that their hours will be reduced or that they will lose their job entirely.
As the subject of raising the minimum wage has created controversy even among economic experts, an optimal policy requires minimizing the potential downsides of raising it and maximizing its benefits. One potential way of doing this is to index the minimum wage to inflation. This will allow the purchasing power of the money low-income workers earn to remain relatively constant over time. But a more helpful strategy would be indexing it to the median U.S. wage. By linking the minimum wage to the general conditions in the market, the federal government could ensure that wage changes are tied to the demand for labor. Furthermore, this would make increases in the minimum wage predictable and gradual, as opposed to employers having to significantly restructure in response to large changes all at once. As Zipperer states, “more than 38 percent of the rise in inequality between the wage paid to the 10th percentile wage and the median wage is due to the minimum wage failing to keep up with the median wage” (Zipperer, 2015). Linking them together would allow the minimum wage to reduce income inequality. And the median wage is better than the average wage for this purpose because the minimum wage is factored into the calculation of the average but not the median.
Although indexing the minimum wage to the median is a good first step, it also matters quite a bit where the initial level is. If the initial level was set where it is today, simply indexing would not make a big difference, while if it was $15 the minimum wage would end up rising a significant amount over the next few years.
Starting in 1948, if the minimum wage had risen in correspondence with the overall productivity of the American economy, it would stand at $20.34 today (Zipperer, 2019). This is clearly excessive, as even the most progressive propositions, such as the Raise the Wage Act, have suggested increasing it over several years to eventually be $15 per hour. But economists’ opposition to this plan discussed earlier suggests that this could be infeasible. Additionally, the Congressional Budget Office (CBO)’s median estimates show that a $15 minimum wage by 2025 would result in significant job loss, confirming the findings of Neumark and Wascher mentioned earlier. And a $10 wage is projected to be essentially useless, with very few people being lifted out of poverty. A more realistic middle ground may be $12 an hour, which the CBO projects to result in much less loss of jobs while still resulting in nearly 500,000 net people out of poverty by 2025 (CBO, 2019). This shows that contrary to the points of Phelan and Sabia discussed earlier, changes in the minimum wage can make a significant impact on individuals in poverty.
Knowing all the information described, the optimal solution appears to be combining two of the above ideas. The federal government should gradually increase the federal minimum wage to $12 by 2025 and thereafter index it to the median U.S. wage. As the charts above demonstrate, this would bring many Americans out of poverty while limiting unemployment, a key concern of those who advocate for not increasing the minimum wage.
Contrary to the opinions of researchers who believe that raising the minimum wage isn’t effective in reducing poverty, the charts displaying raw data from the non-partisan CBO demonstrate that it is. Although there will be some unemployment created from a minimum wage increase, this appears to be outweighed by the income increase that many Americans in poverty will benefit from. And many people would not be affected by this change at all, with over a quarter of the U.S. population already living in states where the state-level minimum wage is at least $12 in 2020.
In summary, the subject of whether the federal minimum wage should be raised, and to what level, is quite nuanced. Even so, there appears to be a solution that would benefit many American low-wage workers while reducing the potential negative consequences of a minimum wage increase such as unemployment. For these reasons, the federal government should enact a $12 per hour minimum wage by 2025 and subsequently index it to the median U.S. wage.