Getty Images stock
Over the years, the minimum wage has not kept pace with the rate of inflation, represented by the red line on the graph.
Jobs, jobs, jobs: If there’s been one theme of the 2012 election, it’s been employment. And for the first time since 2008, some significant progress has been made: The unemployment rate is currently 7.8 percent, the lowest it’s been since President Obama took office.
But not all jobs are created equal. While 60 percent of job losses since the recession have been midwage positions, 58 percent of the growth has been in low-wage jobs. Many of these added positions pay the minimum wage, or little more than the minimum wage.
In light of the growing population of low-wage earners and the ongoing discussion of income inequality in the United States (the 99 percent versus the 1 percent, or the 47 percent versus the 53 percent), LearnVest wanted to take a closer look at the current minimum wage in the United States.
In fact, this past summer, the Fair Minimum Wage Act was introduced in Congress to raise the minimum wage from $7.25 to $9.80 and index it to inflation, making it a current political issue. Though the bill is currently sitting with a committee awaiting further action, if it passes, it could significantly change millions of Americans’ answer to the question: Are you better off than you were four years ago?
The state of the minimum wage
The first minimum wage law was passed in 1938, guaranteeing workers at least 25 cents an hour. The heyday of the minimum wage was in the late 1960s, when the wage was high enough relative to the cost of living to provide a secure income. Since then, it’s risen slowly but surely to $7.25 an hour, which adds up to $15,080 a year for full-time employees.
While the dollar amount has increased over time, the real value has not — it has declined by 30 percent since 1968 because over the years the minimum wage has not kept pace with inflation, which is the increase in the general cost of goods and services over time. That means workers aren’t getting as much bang for their buck, so to speak.
The yearly $15,080 made by a full-time minimum-wage worker, who typically works in retail or food preparation, or as a personal and home-care aide, office clerk, customer service rep, waiter/waitress or construction laborer, is below the poverty level for a two-person household. And for employees working for tips, the minimum wage is even lower — a measly $2.13 an hour.
While the minimum wage barely provides a solid living as is, studies have shown that workers earning the minimum are actually being underpaid by their employers. A 2008 study of low-wage workers in Chicago, Los Angeles and New York found that 26 percent were paid less than the minimum wage, 70 percent worked off the clock before or after their shift and 76 percent were underpaid for overtime hours. All told, this resulted in an average loss of $2,634 in earnings for these workers.
Proponents of the Fair Minimum Wage Act argue that raising the minimum wage to $9.80, and then “indexing” it to inflation so that it rises at the same rate would help ensure that these low-wage earners would take home enough salary to live on and pay for basic goods and services. But would it?
Reasons for raising the minimum wage
1. The minimum wage is below the living wage, exacerbating poverty in the United States
A living wage ensures that a worker can pay for basic necessities like housing, food, transportation to work and health care. A common definition states that the living wage should be high enough that no more than 30 percent of take-home pay needs to be spent on housing.
But full-time employees being paid the current minimum wage will have incomes below the living wage in most areas of the country. In dollar terms, that means that if you are a full-time worker supporting a family of four on the current minimum wage, your household income is $7,000 below the poverty line. Proponents of raising the minimum wage to a living wage argue that doing so would give workers and their families a better chance of climbing out of debt and poverty.
As an increasing number of workers take on low-wage jobs, poverty in the United States has increased: In 2005, 12.6 percent of Americans were living in poverty, compared to 15.7 percent this year (almost 50 million citizens). That's the highest rate of poverty since 1965. Raising the minimum wage to a living wage would hopefully help to reverse this trend.
2. A higher minimum wage means more consumer spending overall
Higher wages don’t just benefit the individual earner. They also help the economy at large by increasing consumer spending. One 2011 study by the Chicago Federal Reserve Bank showed that every dollar added to the hourly minimum wage resulted in $2,800 in yearly additional consumer spending by that worker’s household.
Additionally, a 2009 study from the Economic Policy Institute predicted that upping the minimum wage to $9.50 an hour would result in $60 billion in additional spending over two years. Furthermore, this additional consumer spending would lead to more job creation — an estimated 100,000 new full-time jobs.
3. Workers making more than the minimum wage would also see their earnings increase
Many workers who earn more than the minimum wage — 28 million — would also see their earnings increase as a result of raising the minimum wage, according to the Economic Policy Institute. Why? The minimum wage is seen as the base number from which their wages are calculated, so if that number is raised, their earnings will increase accordingly, and that will lead to even more consumer spending.
Is there a good reason not to raise the minimum wage?
With all the seeming benefits to raising the minimum wage, is there a compelling reason not to raise it, at the very least to a living wage? And why shouldn’t it be indexed to inflation?
Those opposed to raising it often argue that doing so will put too great a strain on employers concerned with keeping costs down, which will ultimately lead to companies being forced to slash jobs to stay afloat. However, economists like Arindrajit Dube of the University of Massachusetts-Amherst showed that over a 16-year period, areas that raised the minimum wage did not see more employment loss than comparable areas with lower minimum wages.
Additionally, two-thirds of the low-wage workers in the United States work for large companies with 100 or more employees who are more able to absorb the higher cost of hourly wages, as opposed to small mom-and-pop operations. Looking at the 50 largest employers of low-wage workers (companies like Wal-Mart, KFC and McDonald’s), more than 90 percent were profitable last year, meaning that they are unlikely to be in a position where raising the minimum wage to a living wage would significantly affect their ability to retain the same number of employees.
While more than 100 Democrats helped to introduce the bill in the House of Representatives during the summer to raise the minimum wage, most Republicans will likely argue that the fragile economy prohibits such a drastic change to the minimum wage. Though President Obama campaigned in 2008 on the promise to raise the minimum wage, he has not been active in that fight in some time, and in March, Mitt Romney retracted comments he had made as recently as January saying that he would like to see the minimum wage indexed to inflation.
Despite the likely political standstill on the minimum wage issue, recent polls have shown that 70 percent of Americans support raising the minimum wage and believe that doing so has the power to help the economy in these uncertain times.
This post originally appeared on LearnVest as 'How Raising the Minimum Wage Would Help the Economy'