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.

  • http://www.facebook.com/gail.stgermain.12 Gail St Germain

    I just spoke last week with some family members who know or are involved in small business entities. The concern is that the employer will be forced to raise the wages but the sales from their business will not cover the additional cost and they will definitely limit hours or number of employees. How can that help?

  • Brooke

    “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.” I work full time, I’m in school full time, and I’m a single parent, and I support myself and my son on my one income, which IS above the poverty line. So I guess we will agree to disagree on this topic!

  • aaronb1979

    There are so many intellectual problems with Mr. Cooper’s assessment of minimum wage. To begin with, his first argument, relating to the gap between the minimum wage and average wage actually demonstrates why raising the minimum wage is not as necessary. Why? Because his numbers imply that the minimum wage has become less relevant. In order for the average wage to be relatively higher than minimum wage when compared to the 1960′s figures, either less people are earning a minimum wage, or people are just being paid more, overall. Either way, one could easily use that statistic, alone, to argue the insignificance of raising a minimum wage.

    Secondly, this idea of comparing minimum wage to productivity is kind of silly, because it makes some really huge (and fantasy-like) assumptions. The biggest of these assumptions, generally endorsed by most pro-minimum wagers, is the idea that the workers, on their own, have become more productive than in the 1960s. In reality, though, the reason these workers have become more “productive” is because of new technologies that do a lot of the work that the workers previously had to do themselves. For instance, in the 1960s, a fast food clerk had to actually know how to cook, whereas much of the big fast food companies, today, rely on automation and mass preparations to increase productivity. Yes, we are able to sell more food in a faster time, but NOT because these people are working harder than before…. technology has made their jobs easier and faster. So couple the minimum wage with that of the cost of technologies needed to bring production to where it is today, and those numbers will make more logical sense.

    Finally, the graph that Mr. Cooper presents assumes that raising the lowest wage possible does not affect overall inflation rates. I and many disagree with that assumption. This assumption has been made because of the delayed consequences of raising a minimum wage makes it easier to ignore any statistical correlations that may actually exist. I’ll try to explain: IF the government does what they say they want to, and raise minimum wage to $10.10 an hour, businesses are not going to go and fire all of their minimum wage employees. However, they are probably going to expect more from their existing minimum wage employees, to close the value of compensation vs. individual employee productivity gap. Companies will also become more selective when hiring, just because they can. With wages at a higher rate, they can now hire $10.10 an hour talent, leaving people with little work experience and little to no skills less opportunity to break into the market. Over the next few years, companies will slowly adjust their pricing and overall compensation plans to accommodate the new wages, which will eventually devalue the $10.10 per hour wage to roughly the value of our current minimum wage, or even lower. We call this inflation.

    If you really want to change lives, rather than focusing on how to increase the LOWEST WAGE POSSIBLE, maybe economic thinkers should put more effort into figuring out how to move people OUT of the LOWEST WAGE POSSIBLE through upward mobility. (Or maybe that’s already happening, given the increase of the income gap described in this article!)