Putting a $9 minimum wage in context

Raising the minimum wage to $9.00 per hour, as the President called for in his State of the Union address, would be a good step toward reversing some of the huge decline in the purchasing power of the minimum wage that has occurred over the past 45 years.  Now as lawmakers, pundits, bloggers, economists, and the public begin talking about the president’s proposal, it’s important that we keep the true value of the minimum wage in context, and look at how the president’s proposed minimum wage compares both with precedent and what the minimum wage might have been had we not let its value erode for so long.

In his speech, the President noted that a parent who is a minimum wage worker and works full time, year round, does not make enough money to be above the federal poverty line.  This wasn’t always the case.  Figure 1 shows the annual earnings of a minimum wage worker compared with the federal poverty line for a family of two or three. Until the 1980s, earning the minimum wage was enough for a single parent to not live in poverty.  Indeed, a minimum-wage income in 1968 was higher than the poverty line for a family of three.  But as the figure shows, today’s minimum wage is not enough for single-parents to reach even the most basic threshold of adequate living standards.  The president’s proposal to raise the minimum to $9 per hour would bring the minimum wage back to a more reasonable level, although it would still fall short of the 1968 peak.

Moreover, the gap between the minimum wage and the average wage of production and non-supervisory workers used to be much smaller.  Figure 2 shows the minimum wage as a percentage of the average wage.  Through the 1960s, minimum-wage workers earned about 50 percent of what the average American production worker earned.  Over time, as the value of the minimum wage has eroded, the wage gap between minimum wage workers and the typical American worker has grown to the point where, today, a minimum-wage worker earns only 37 percent of what the typical worker earns.  Raising the minimum to $9 per hour would help to close this gap, but again, would still be noticeably below the levels of the 1960s.

The bottom line, as Dean Baker has pointed out, is that over the last 40 years, minimum-wage workers have not seen the benefits of a growing economy.  As productivity has increased and the economy has expanded, the minimum wage has been left to stagnate.  Imagine what the minimum wage would look like today if it had kept pace with productivity growth.  Figure 3 shows the actual value of the minimum wage over time, compared with what it might have been under three other scenarios.

As the figure shows, if the minimum wage had kept pace with average wages—i.e., if minimum wage workers saw their paychecks expand at the same rate as the average worker—it would be about $10.50 today.   If the minimum wage had kept pace with productivity[i]—i.e., the economy’s overall capacity to generate income— it would be almost $18.75 today. Finally, imagine if workers at the very bottom were seeing the same kind of raises as workers at the very top.  If the minimum wage had gone up at the same rate as wages for the top 1 percent, it would be over $28 per hour.[ii] 

Update: Shawn Fremstad at CEPR explains why even after tax credits like the EITC, a $9 minimum wage still would fall short of keeping all families out of poverty.

[i] Total economy productivity.

[ii] Inflation projections made using the CBO’s inflation projections for the Consumer Price Index.  Productivity, average wages, and wages at the top 1% were projected out from their 2012 or 2011 values at the average annual growth rate for each series from 2002-2006, the last full regular business cycle.