Thursday, July 24, 2008

The minimum wage: some history and a modest proposal

The federal minimum wage increases 70 cents today from $5.85 to $6.55 per hour. The increase is the second since the Fair Minimum Wage Act of 2007 was passed. At that time the federal minimum wage was $5.15 and had remained at that level since 1997. Next year the minimum wage will increase again to $7.25.

At first glance, the increases appear to be very generous. However, when adjusted for inflation (using the Consumer Price Index for All Urban Consumers), the recent wages are quite modest in historic terms. To see this, consider the minimum wages before and after changes over the last four decades.



Federal minimum wage over time
Year Nominal value Real value
(2008 dollars)
1968 $1.60 $10.06

1973 $1.60 $7.88
1974 $2.00 $8.88
1975 $2.10 $8.54
1976 $2.30 $8.84
1977 $2.30 $8.30
1978 $2.65 $8.89
1979 $2.90 $8.74
1980 $3.10 $8.23
1981 $3.35 $8.06

1989 $3.35 $5.91
1990 $3.80 $6.36
1991 $4.25 $6.83

1995 $4.25 $6.10
1996 $4.75 $6.62
1997 $5.15 $7.02

2006 $5.15 $5.59
2007 $5.85 $6.17
2008 $6.55 $6.55
2009 $7.25

Over the last 40 years, the real value of the minimum wage has been as high as $10 per hour (1968) and as low as $5.59 per hour (2006). Over the decade of the 1970s the real minimum wage averaged $8.61; over the 1980s, it averaged $7.04, and over the 1990s, it averaged $6.59.

Today's value of $6.55 is below all of those averages. Assuming that inflation over the next year is at or above 4 percent, next year's nominal increase to $7.25 would be worth less than $7.00 in today's dollars--below the average from the 1980s and below the value from 1997. All in all, these are very modest amounts.

Minimum wage policy is subject to intense political squabbling. Democrats generally favor higher minimum wages on fairness grounds. Republicans generally oppose the increases because they raise costs for businesses and can reduce employment. In the past, these differences have led to long impasses where the nominal wage remains fixed. Before the 2007 legislation, the minimum wage had not been adjusted in a decade. Minimum wages were also fixed in nominal terms for five years in the 1990s and for nine years in the 1980s. During these periods, the real value of the wage declined substantially.

Regardless of your views on the effectiveness of the minimum wage, this is a terrible way to make policy--letting the wage drift down and then coming back with large adjustments every year. It's hard to rationalize a saw-tooth pattern in wage rates.

A modest proposal is to accept that next year's value of $7.25 represents a consensus of where the federal minimum wage "should" be. If this is the consensus value, it should be automatically adjusted/indexed for inflation starting in 2010. Should a new consensus or new circumstances develop, the wage could subsequently be legislated up or down. Effectively, indexing would change the default for minimum wage policy from one in which the real value generally erodes to one in which the real value stays constant.

Businesses and their conservative backers should be willing to accept indexing because it removes some uncertainty from wage policy, keeps the wage at a historically modest level, and takes the steam out of progressive calls for wage jumps. Progressives should accept it because it establishes the minimum wage near its highest real value in the last 20 years.

What about it Washington?

4 comments:

Doug Johnson said...

Wonder how many people lost their jobs over this increase?

Dave Ribar said...

Doug:

Given the historically low level of the wage (even after the increase), the employment impact is likely to be negligible. Also, many (30 or so) states currently have laws that set minimum wages higher than the federal wage; so, the federal change doesn't affect anything there.

Doug Johnson said...

Its only negligible, if you are not the one losing your job.

Robert Stinnett said...

Well Doug it's hard for the fat-cats at the top to fire more of those "low life" minimum wage workers because, after all, have you been in a Wal-Mart lately? Good luck finding anyone to help you! They are already down to the bone in terms of staffing so they can funnel the maximum amount of money to the top. So this nonsense of people losing their jobs is just that -- nonsense.

It's ridiculous that in 1968 people were earning more per hour (adjusted for inflation) than they are now by almost a factor of two. It's ridiculous that you'd have to work three minimum wage jobs nowadays to provide the basic necessities to a family of 3. It's ridiculous that these people probably don't even have access to basic healthcare. It's ridiculous that people at the top continue to see increases for sitting on their ass while the workers get shafted year in and year out.

It used to be a rising tide lifted all boats -- lower, middle and upper class. Now we are to the point where a rising tide only lifts the yachts.