Increase the Minimum Wage

By Jared Bernstein

Sep. 26, 2005

As the floodwaters recede in the Gulf Coast, a set of questions is emerging. Many of these are important questions about the lack of preparedness and the bungled response, both of which had lethal consequences.

    But the disaster of Hurricane Katrina is motivating another pressing discussion, one about the role of government in the lives of our families, our communities and our workplaces. Obviously, the dominant political agenda in recent years has espoused smaller government. And while politicians’ spending habits haven’t matched their rhetoric, the message from Washington has been clear: You’re better off on your own.

    Let’s consider the fate of the federal minimum wage in this context. What role does it play in today’s job market, and what role should it play? Are low-wage workers really better off without the government imposing a minimum wage?

    The minimum wage was a Depression-era program, introduced in 1938 at a level of 25 cents per hour. At this time of one of our most damaging market failures, labor market conditions were hammering wage offers down to impoverishment levels, and Congress created the mandate to reverse the tide. Since then, it has been raised 19 times at the federal level, most recently in 1997, and it now stands at $5.15 per hour.

    Though it has raised the wage, Congress has never indexed it to inflation, and thus its buying power falls every time prices rise. Since the last increase, the real (inflation-adjusted) value of the minimum wage is down 18 percent. And that’s just the average change in prices. The costs of certain basic necessities facing working families–health care (up 37 percent), child care (44 percent) and housing (24 percent)–are rising much faster.

    Those who argue against the importance of the wage floor have tried to make the case that these price changes don’t matter, because it’s really only teenagers in upper-income families that earn the minimum wage. If only it were so.

    Most workers earning at or near the minimum wage, about 70 percent, are adults, and their families depend on their incomes. Over half of the gains from raising the minimum wage go to working families in the bottom 40 percent of the income scale, with an average income of about $30,000. Many of these families are above poverty, but none are on Easy Street, and as the value of the minimum wage erodes, it’s that much harder for them to get ahead.

    In fact, the Census Bureau just released a report showing that the number of people who work and are poor rose by 563,000 from 2003 to 2004. Following the last increase of the minimum wage, in the mid-1990s, the number of working poor fell by over 400,000.

    What about the arguments that minimum wage increases lead employers to simply lay workers off now that they are more expensive? While this sounds logical–shoppers may buy fewer tomatoes when their price rises–it’s really an empirical question. And the answer, supported by decades of research, is that workers aren’t tomatoes. Moderate minimum wage increases, which are the only kind the political system serves up, simply do not lead to the layoffs predicted by the textbook model.

    If you’re skeptical, consider two recent time periods: the latter 1990s and the 2000s. The minimum wage was increased in 1996 and 1997, and therein followed the best few years for employment gains by low-wage workers in over 30 years. Conversely, in the 2000s, when we’ve allowed the real minimum to fall to its second-lowest level since 1955, employment and wage growth has been weak at best, generating the poverty results just discussed.

    But wait, you say. You’re comparing a strong economy to a weak one. Exactly. It’s macroeconomic conditions that determine the availability of jobs for low-wage workers. The minimum wage determines whether they’re going to get a fair shake on payday.

    The minimum wage still matters, and it still has a useful role to play in the low end of our labor market. The motivation for the policy is as germane today as when it was first introduced. Congress has a right and an obligation to ensure that market conditions do not drive the wages of those with the least bargaining power down to unacceptably low levels.

    Expanding on this theme, it is becoming clear to many of us that in a post-Katrina world, we’d best re-evaluate the role of government. We now have vivid evidence of the cost of “you’re on your own” politics. Re-establishing a higher minimum wage won’t undo the horrible damage we’ve witnessed over the past few weeks. But by providing a much-needed boost to the living standards of our least-advantaged workers, it is a small step in the right direction.

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