National Minimum Wage: Should it be Raised & Indexed?

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?

Related Posts:


  1. Honey
  2. Edgar @ Degrees and Debt
  3. JTM316
      • JTM316
        • Irena
          • Irena
          • Nicholas
  4. Jon D
  5. Irwin
  6. SD Lurker
  7. Nicholas
    • Andrew
  8. ~Matt~

Leave a Reply

Join 10,000+ wealth builders. Get posts emailed to you, for free.