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Home » Personal Finance News

National Minimum Wage: Should it be Raised & Indexed?

Last updated by on 14 Comments

The national minimum wage debate is fun.

And because the federal minimum wage is not currently indexed to cost of living changes, it usually rears its head every 5 years or so, as it stagnates for a while and politicians change.

And it recently has re-entered the public discourse. President Obama called for an increase in the minimum wage to $9 per hour, in the State of the Union last week. Specifically, he had this to say:

“We know our economy is stronger when we reward an honest day’s work with honest wages.  But today, a full-time worker making the minimum wage earns $14,500 a year.  Even with the tax relief we put in place, a family with two kids that earns the minimum wage still lives below the poverty line.  That’s wrong.  That’s why, since the last time this Congress raised the minimum wage, 19 states have chosen to bump theirs even higher.

Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour.”

An increase to $9, would signify a 24% increase over the existing $7.25 minimum wage.

He has also called for it to be indexed to cost of living, as it currently is not.

How does $9 stack up historically?

The Historical Minimum Wage

national minimum wageThe national minimum wage was first established in 1938 at $0.25.

From there, it has seen a number of increases over the years. Here are some notable changes (check out the link for a full history):

  • 1938: $0.25 (first national minimum wage)
  • 1956: $1.00
  • 1974: $2.00
  • 1980: $3.10
  • 1990: $3.90
  • 1997: $5.15 (last increase until 2007)
  • 2007: $5.85
  • 2008: $6.55
  • 2009: $7.25 (most recent increase)

I remember working in high school at $5.15 an hour at a local grocery store. I didn’t have any costs to speak of outside of new clothes and a car (not coincidentally, both to get chicks), so it was big money for me.

Adjusting the minimum wage to today’s value of money adds a little more context. Here’s a graphical representation of minimum wage in actual (dark purple) and inflation adjusted (light purple) dollars. As you can see, the purchasing power of a minimum wage salary has not kept up with the cost of living, and is at its lowest relative value since the 40′s, just after the creation of the minimum wage. At one point, in the late 60′s, it reached a level equivalent to just over $10 in wages today.

historical minimum wage

Who is Covered by the Minimum Wage?

More than 90% of countries have minimum wage laws. In the United States, most workers are covered under the Fair Labor Standards Act, unless there is a special exemption or a state law that supersedes it.

As of 2011, 3.8 million workers had wages at or below the Federal minimum, making up 5.2% of all hourly-paid workers, according to the Bureau of Labor Statistics.

The Minimum Wage Debate:

The prospects of raising the minimum wage usually makes for some interesting debate discourse:

Those in favor of raising the minimum wage usually cite one or a combination of the following reasons:

  • It’s difficult to make a living, working full-time at today’s minimum wage. A full-time worker should not have to live off of government assistance to get by.
  • If you increase the minimum wage, you decrease the need for government assistance like food stamps and welfare payments.
  • Minimum wages (b/c they haven’t been indexed to cost of living) have not kept up with inflation, so a minimum wage worker’s purchasing power is less today than it was in the past (this is true, as highlighted in the chart previously shown).
  • Putting more money in the pockets of those who need it the most results in a more robust economy, because those workers will spend it (and they will have earned it).
  • Allows a more legitimate means of making ends meet, versus crime, drugs, or other illegal means.
  • Large retail and fast food hold a lot of market power and suppress wages by all offering no more than the minimum wage. Therefore, there is no free market wage setting at work, as wages are purposefully kept low.

Those against raising the minimum wage usually make one or a combination of the following arguments:

  • The government shouldn’t get involved in wage setting. Let the free market do its thing. Wages will take care of itself.
  • Raising wages increases the supply of workers and/or decreases the demand for workers. The result is higher unemployment.
  • Higher wages leads to higher prices for consumers and inflation.
  • It hurts small businesses more than large businesses.
  • Leads to more discrimination against lowest skilled workers and teenagers as the worker supply increases.

How Does a Minimum Wage Increases Poll?

In a 2012 pre-election poll, 91% of likely democratic voters supported an increase in the minimum wage to $10. If you expected the exact opposite from Republicans, you’d be wrong. 50% of likely Republican voters supported the same increase, while 41% opposed. Overall, 73% supported and only 20% opposed. That kind of bi-partisan support is rare in today’s polarizing political climate.

Republican leadership has come out against raises after the State of the Union. However, the last round of minimum wage increases in 2007 (signed by President Bush) resulted in a bi-partisan 94-3 senate vote when tax cuts were added in for small business.

When it comes to voting on this, it’s hard to go against strong bi-partisan public support.

What would the Impact of a Minimum Wage Increase be?

How an indexed minimum wage increase would play out micro and macro-economically is tough to say.

Would it lead to job losses and an unemployment increase? Some economic theory points to the possibility, but history has proven otherwise. The Center for Economic and Policy Research recently reviewed the aggregate research on such studies and concluded there was little to no discernible effect on low wage workers outside of a small increase in unemployment percentage for teenagers.

When we think minimum wage, the biggest concentration is in two industries: fast food and retail. Would we see price increases in these sectors? It could happen, if 100% of the cost is passed to consumers. How much would that cost increase be? The Demos Organization calculated that if all full-time, year-round retail employees had their wages increased to $12 per hour, the impact would be a $17.73 annual rise in prices to the average end consumer if 100% of the cost was passed along to the consumer (but at the same time, it would lift 1.5 million workers up from in or near poverty, increasing GDP between $11.8 and $15.2 billion per year, and add 100,000 to 132,000 additional jobs).

The reality is than many highly profitable large employers would be able to eat the increased cost without passing along to consumers.

Small business, however, might not be so lucky. Of all the “nay” arguments, I think this is the most legitimate. And tax credits should be looked at for small business that employ a certain number of employees, yet earn under a certain threshold, as they cannot as quickly or easily absorb the increase in costs as a mega corporation.

I haven’t earned minimum wage since high school, but I see the value in maintaining a fair working wage for the lowest of low income workers by indexing to actual cost of living (which also removes the BS political debate every few years). We aren’t talking about a doubling of standard of living here. We’re just talking about keeping up with the cost of living. It maintains purchasing power, cuts government dependence, and might even add a little bit of motivation, pride, and hope to workers. Studies have shown more positive effects than negative.

I don’t really spend anything in retail or fast food, any price increases passed along to me would quickly be brushed off by riding my bike instead of driving my car on a few shopping trips. I’m not trying to be partisan here. I just think it makes common sense. Lets index the damn thing already!

What’s your take?

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14 Comments »
  • Honey says:

    I agree, it should be raised and indexed. Seems like a no-brainer.

  • I guess I was lucky working at 14 in Massachusetts since the state had a minimum wage law above and beyond the federal. I was getting $6.75 minimum wage in 2002 compared to $5.15 federal.

  • JTM316 says:

    It may sound like common sense to index the minimum wage, but I’m not entirely sure it will have the effect many people think it will. The federal government is currently increasing the supply of dollars being circulated (via the federal reserve), simultaneously killing your purchasing power as they claim to be helping you by increasing the minimum wage. Both President Obama and Federal Reserve Chair Ben Bernanke have openly stated they have no intent of ending this monetary policy anytime soon.

    While I agree with you that “the reality is that many highly profitable large employers would be able to eat the increased cost without passing along to consumers,” the question becomes: will they? If they do at first, will they continue to? If the answer becomes “no” at any point (now or later), the cost gets passed along to consumers once again.

    The indexing may sound nice to people when they hear about it in the media, but very few will be able to significantly improve their situation as a result of this policy.

    • G.E. Miller says:

      The monetary policy that you speak of (quantitative easing) may theoretically cause purchasing power to decline by increasing inflation and consumer prices. However, consumer prices have not increased at all, in reality. Check out the CPI here: http://www.bls.gov/news.release/cpi.nr0.htm
      2012 saw a 1.7% increase, and 100% of that was from gasoline price increases in August and September. November/December actually saw a .3% decline.
      So your point on quantitative easing increasing CPI as a fact is not correct.

      Your point on passing costs along, I addressed in the article. If the ave. price increase is $17 (@$12/hr.) with 100% being passed along, for me it’s prob. $3-5. If only partial costs are passed along, maybe it’s $1-2. That’s as insignificant as leaving my tires at 29 PSI vs. the recommended 30 PSI. It’s nothing. At least not big enough reason for me to make a legitimate claim that it shouldn’t be done for people who would need and use it.

      However, over time, the alternative of not indexing should be that purchasing power declines due to cost of living increases, as proven over the past 70 years. So I guess I don’t understand your point on it not helping people.

      • JTM316 says:

        QE itself does, in fact, raise CPI; however, there are other forces in action that are holding inflation and the CPI at the low rates you cited. Honestly though, that fact is neither here nor there in this case.

        I am not necessarily in opposition to indexing the minimum wage for now. It’s a move that will certainly be popular, as you illustrated. It is my belief, however, that all the attention that this is getting in the media should be directed elsewhere. We have far larger decisions looming – the consequences of which will be felt by our generation and future ones as well. We should be calling our politicians to task now instead of being appeased by moves such as this. The longer they wait to act on our economic issues, the more severe the consequences will be for the American citizen.

        Now this may be a very “macro” view, but I feel that, all things considered, down the road the government has some significant policy changes it will have to make. It will have to raise taxes, cut it’s own spending, or the more likely scenario: do both. We are running a national debt of nearly $17 trillion (and rising) and are about to take on one of the largest social programs in US history: The PPACA (or as others refer to it as: Obamacare). I suppose we could just choose to not pay down the debt, but the consequences of doing so could be life altering to many Americans – and not in a good way. As a result of all these forces at work, I contend that the indexing of the minimum wage will be somewhat irrelevant to the quality of life of the American citizen. We will all be in shared poverty.

          • Irena says:

            Sorry, I should have said this in my last post, but I think it’s worth mentioning Peter Schiff predited the 2008 financial crisis while economists in Washington like Bernanke didn’t. If you search up “Peter Schiff was Right”, you’ll see what I mean. Actually I’ll just link it here: http://www.youtube.com/watch?v=2I0QN-FYkpw

            Schiff is also predicting another crisis which will be more severe than the one in 2008. He calls this the bond bubble.

            There’s no way that if the government is printing this much money ie. QE 3 ($40 billion a month) with no fixed end, that this isn’t causing inflation. You can’t just print money without any consequences– just look at Zimbabwe.

            Eventually people are going to stop buying US Treasuries. Schiff says that 90% of the new bonds next year will be bought by the Fed and that the Fed’s balance sheet will be $4 trillion next year.

            So really, this minimum wage increase debate is a non-issue compared to the impending out of control inflation.

          • Nicholas says:

            Peter Schiff is brilliant. He understands the market better than any other modern economist. I was capitalized tremendously off of his book “Crash Proof: How to Profit from the Coming Economic Collapse”. Following Austrian economic theory has made me a small fortune, while all these big-government Keynesians put their faith in Ben Bernanke. Good luck with that.

  • Jon D says:

    The minimum wage debate is a tricky one. If you set it too high then it has the potential to drive jobs away from the US. However if you simply allow a free market to set the wage then you run the risk of slave labour, which is exactly why a minimum wage was introduced in the first place. the decision should be made in conjunction with business representatives and Government bodies. If you exclude business then you run the risk of being completely out of step with the competitive nature of business models

  • Irwin says:

    Price fixing. That is, the price of doing business. Another bad idea brought to you by this administration.

    Another 2 dollars / hour doesn’t get you that much more out of the minimum wage lifestyle other than more disposable income, especially at just 9 / hour. I doubt the first thing that would come to mind is “let’s put this into savings”.

    I’m pretty sure we’ve come up with much more effective micro policies for alleviating poverty than broad financial mandates that yet again discourage businesses from doing business.

    As low wage jobs dried up during this current recession, unskilled immigrants (let’s not start get started with the skilled ones who are leaving) left. Where to if you’re a citizen and these low wage jobs continue their decline? Bingo – the government! Great, we’ve come full circle, and the government has set itself up to be the answer.

    Does this mean they get more votes?

  • SD Lurker says:

    I find G.E. Miller’s justification for a minimum wage increase convincing unlike the poor arguments laid out by this President.

    “We know our economy is stronger when we reward an honest day’s work with honest wages.”

    I have no idea what that means other than being an just another sophomoric play to the emotions of the audience. Obama apparently thinks that Americans are not worthy of real argument with facts and figures as expressed by Miller above. “Honesty” & “fairness” are subjective metrics – only valid in the eyes of the beholder. Markets are unemotional and set wages based on the value of your labor NOT on what you or some vote-gathering politician thinks they should be.

    “But today, a full-time worker making the minimum wage earns $14,500 a year. Even with the tax relief we put in place, a family with two kids that earns the minimum wage still lives below the poverty line. That’s wrong. That’s why, since the last time this Congress raised the minimum wage, 19 states have chosen to bump theirs even higher.”

    Obama, in his thread-worn style, sets out a “straw man” argument suggesting that minimum wage earners can’t support families with two children but NEVER claiming that any significant number of the minimum wage earners ACTUALLY are in such family circumstances. He could just as well have said that minimum wage earners with BMWs cannot afford to put gas in their car. Doesn’t matter, he always gets away with these rhetorical slights of hand.
    Well, at least he didn’t claim it was Bush’s fault.

    “Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour.”

    Wealthiest nation on Earth? Really? It won’t be long before we approach a national debt of $ 18 Trillion dollars thanks to the largesse of the Obama policies! That amounts to $60,000 for every man, woman and child in this country. If you throw in the unfunded future mandates that figure grows to something like $150,000 per capita. The fact of the matter is that most people are already in poverty in the sense that the country is theoretically bankrupt.

    Some day, when the American people learn to actually listen to his words and dissect the meaningless rhetoric akin to that of the “wizard of Oz”, they will understand that he is the master of the “Grand Useless Gesture”. If he had something REALLY significant to communicate to the public he would not have to shout so load.

  • Nicholas says:

    Minimum wage is bad policy. Period. Anyone who has studied free market economics knows this. It inflates prices, and empowers illegal immigrants. Not to mention, in the history of the minimum wage it has NEVER done what it has set out to do. Of course, it “sounds” good which is why the politicians push for it. Not to mention, it goes against what this country was founded on. If someone wants to hire me for $2/hr and I accept this position because it is a better alternative to starving, why should the government put a gun to my employer and say “Thats not enough”. This may discourage or disallow me from being hired all together. But of course, in the days when people can get paid to stay home rather than work, its no wonder policy like this gets through. Illegal immigrants happily accept lower wages, because it’s either work for cheap or starve.

  • ~Matt~ says:

    There are a lot of things to consider, Raising the minimum wage to $10 will for the short term cause a number of current $10Hr earners to move around, cause now you have options and you can choose a different job at your current pay rate. I am not sure how you would calculate the government savings from people now being above thresholds for assistance programs. Which would be adjusted to the new wage increase as the cost of basic goods increases putting people back on the programs? Maybe a better focus than raising the minimum wage would be returning more value to the dollar.

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