June 1995 | EPI Briefing Paper #53
In spite of the growing economy of the 1990s, the squeeze on family incomes that began in the 1980s has been made even tighter. According to the latest data, the only families able to achieve any income growth between 1989 and 1993 were the best-off 5% of families. Moreover, median family income fell four years in a row after 1989, the longest income decline in the post-war period. The years 1991-93 also marked the first time that incomes declined during the first two years of an economic recovery (Mishel and Bernstein 1994). It is highly unlikely that middle-class incomes rose much, or at all, between 1993 and 1994 since the median weekly wages of full-time workers, both men and women, failed to keep up with inflation.
This persistent economic squeeze on families is the consequence of the continuing deterioration of real wages for the vast majority of workers and the dramatic growth in the wage gap between high-wage workers and those earning middle or low wages. Not surprisingly, economic policy debates have centered on what, if anything, government can do to reverse these adverse trends. An interest in higher wages has also been generated by the need to “make work pay” so that welfare recipients can be shifted into jobs.
The recent Clinton administration proposal to raise the minimum wage has been offered as one mechanism to improve the incomes of low- and lower-middle income working families. This policy seems an especially simple and worthy effort, since research has shown that there was little, if any, job loss resulting from the minimum-wage hikes in 1990 and 1991 (See reviews in Card and Krueger (1995) and Spriggs and Klein (1994)). The pressing questions that remain about raising the minimum wage is whether it will significantly lessen wage inequality and what types of workers and families will benefit? This paper analyzes these questions and finds:
- A higher minimum wage will most benefit families with the least income low- income and lower middle-class families. Seventy-six percent of the benefits of the Clinton minimum wage proposal will go to working families with below average incomes.
- Minimum-wage earners are primarily women (57.9%), have full-time jobs (47.2%) or work between 20 and 35 hours weekly (33.3%), are disproportionately black (15%) or Hispanic (13.8%), and are concentrated in the low-wage retail sector (44.3%).
- Minimum-wage earners are frequently the only earner in their family (38.8%) and, on average, contribute half of their family’s earnings.
- Only 11.7% of the beneficiaries of a higher minimum wage are teenagers in families with above-average incomes.
- The Clinton administration proposal only partially restores the deterioration in the minimum wage since 1979: in 1996, after two $.45 increases, the minimum wage would still be 14% below its purchasing power in 1979.
- A higher minimum wage will help reverse the growth of wage inequality that occured over the 1979-93 period, especially among women.
The Clinton Proposal The Clinton administration proposes that the minimum wage be increased from its current $4.25 level to $4.70 in July 1995 and to $5.15 in July 1996. These increases will only partially offset the 27% decline in the inflation-adjusted value of the minimum wage over the 1979-94 period. In fact, even with the proposed increases, the minimum wage in 1996 will still be 14% of its value in 1979 (or 1967). In order for the minimum wage to return to its 1979 level, it would have to be raised to $5.98 in 1996. Who Are Minimum-Wage Workers? Table 1 analyzes data for 1993 to present the demographic and job characteristics of workers who would benefit from the proposed minimum-wage increase (those earning from $4.25 to $5.14) and compares them to other low-wage workers who would likely benefit from the spillover or indirect effect (those earning within a dollar of the new minimum, $5.15 to $6.14) and to the remainder of the workforce. The minimum-wage increase will directly affect 11.7% of all earners, or 12.26 million workers, and indirectly affect an additional 8.933 million workers, or 8.5% of all earners.
The Clinton proposal will primarily affect adult working women and disproportionately benefit minorities. Only 25.6% of workers affected would be teenagers. Most of the direct beneficiaries of a new minimum wage are women (57.9%) and minority men (6.3% are black men, 7.3% Hispanic).
Nearly half (47.2%) of those benefiting from the new minimum wage are full-time workers; an additional third work between 20 and 35 hours weekly. Only a small minority of beneficiaries (19.4%) work less than 20 hours a week. The average minimum-wage worker works 30 hours per week.
Minimum-wage earners are heavily concentrated in the retail trade sector. Although the retail trade workforce was only 17% of all earners in 1993, this group accounted for 44.3% of all minimum- wage earners.
Table 2 and Table 3 examine the extent to which a minimum-wage increase will affect wage differentials (i.e., the magnitude of the wage gap between highly paid workers and low- wage workers, or between more-educated and less-educated workers) and reverse the growth in wage inequality since 1979. Two levels of a new minimum-wage increase are considered the Clinton proposal of $5.15 and the level needed to restore the minimum to the purchasing power it had in 1979, or $5.66 (in 1993 dollars). The effect of a new minimum wage is simulated in two ways. The first assumes that the minimum-wage increase has only a “direct” effect, that is, it raises the wages of those earning between the current level and the proposed new level up to the new level. The second estimate assumes that there is also an indirect effect on workers earning below the current minimum (referred to here as “subminimum-wage earners”), and a spillover effect that boosts the earnings of workers in some low-wage sectors who are currently earning more than the minimum (this estimate uses the results in Spriggs and Klein (1994)).
Labor economists frequently discuss the growth of wage inequality in terms of the change in the pay gap between high wages (90th percentile), median wages (50th percentile), and low wages (10th percentile). Tables 2 and 3 strongly suggest that the pay level of low-wage (10th percentile) earners, both men and women, is essentially determined by the legislated minimum. The fall in real wages at the 10th percentile since 1979 is almost definitionally the result of allowing the minimum wage’s value to decline. It is also important to note that the impact of a higher minimum wage is greater for women than for men because low-wage women have lower wages ($4.50) in the absence of a new minimum. The minimum wage also has its greatest effect on those who have not completed high school (“Less than High School”).
Table 3 shows that the deterioration of the value of the minimum wage since 1979 fully explains the growth in the pay gap between middle-wage earners (at the median, or 50th percentile) and low-wage earners (at the 10th percentile) among both men and women. For instance, if the minimum wage had been restored to its 1979 value in 1993, the 50/10 pay gap among women would have been 22.1 points less (column 3b), enough to offset the entire growth of that differential over the 1979-93 period. The more modest Clinton proposal would reve
rse over half (13.0 or 13.5 percentage points) of the 1979-93 growth in the 50/10 pay gap among women. There is a comparable impact among men.
A minimum wage increase has a smaller effect on the college/high school differential than on the college/less than high school differential, and it has a larger effect on education differentials among women than men. The Clinton proposal would reduce the college/high school differential among women by 4% to 11% of the growth of this pay gap over the 1979-93 period. A return to the 1979 level could reverse as much as 20% (3.3 of 16.9 percentage points) of the growth of the college/high school pay gap among women. The largest impact of a higher minimum wage on education differentials would be the closing of the gap between college-educated women and those not completing high school.
Which Families Gain? This section examines the income and characteristics of the families of workers who will benefit from the Clinton administration’s proposal to raise the minimum wage.
Table 4 connects information on whether a worker will be affected by the minimum-wage increase to the total weekly earnings of all members of his or her family. This information tells us whether minimum-wage workers tend to come from poor, middle-income, or relatively well-off families. These data show overwhelmingly that minimum-wage earners are concentrated in families with the lowest earnings. For instance, over half (51.6%) of all minimum-wage earners are in the poorest 20 percent of families (those with earnings less than $360 weekly, or roughly $18,720 annually, in 1993). Similarly, 83.7% of minimum- wage earners are in the bottom 60 percent of families (those earning less than $840 weekly, or $43,680 annually).
Minimum-wage earners are also important contributors to their family’s economic well-being: in 1993, those who would benefit from the Clinton proposal contributed 50.1% of their family’s total weekly earnings.
Table 5 provides further evidence that minimum-wage earners have a substantial commitment to the labor market and are important earners in their families. This table draws on data on minimum-wage earners’ family earnings over the full year of 1993 (the earlier data was limited to the prior weeks’ earnings) and allows us to examine their share of family income (which includes other sources besides earnings).
We have already seen from Table 1 that nearly half of minimum wage earners work full-time and that another third work between twenty and thirty-five hours weekly. The data in Table 5 show that minimum-wage earners in 1993 worked 40 weeks on average, and over half (52.4%) worked full-year. Minimum-wage earners contribute half (48.6%) of the total annual earnings of their families. Another indication of their importance to families is that 38.8% of minimum-wage earners are the only earner in their family, another 35.6% are one of only two earners in their family.
Table 6 is comparable to Table 4 except that it uses data that allow us to categorize families by their annual income (as opposed to their total weekly earnings). These data confirm that minimum-wage earners are concentrated in the bottom segments of the income distribution: roughly 40 percent (39.6%) of minimum- wage earners are in the poorest fifth of families those with annual incomes less than $22,000 in 1993). Moreover, 71.3% of minimum-wage earners are in families with below-average incomes. A higher minimum wage will also benefit many working families in the middle class since 32.8% of minimum wage earners are in families with annual incomes ranging from $22,000 to $48,937.
Table 7 presents a further breakdown of minimum-wage earners to assess how many are teens in upper-income families. As we have seen, teens make up only a small proportion-25.4%- of all minimum-wage earners and many of them come from families with modest incomes. In fact, only 11.7% of minimum-wage earners are teens in families with above-average incomes, (those above $47,507). In contrast, 57.6% of minimum wage earners are adults in families with below-average incomes.
Table 8 the “bottom line” computation of which families benefit from a higher minimum wage calculates the potential annual gain to each worker based on the amount their wage increases (i.e., based on the distance to the new minimum) and their annual hours worked. Given this information, it is possible to calculate the share of the aggregate wage gain generated from the higher minimum wage that accrues to each family income fifth as shown in Table 8, 40.9% of the gains generated by a higher minimum wage to either $5.15 or $5.66 would be received by the poorest 20% of families, and over 61.1% of the gains would be received by the poorest 40% of families. In all, 76% of the benefits of a higher minimum wage would go to families with below-average incomes.
The minimum wage generates the most help to those with the least income and the least help to those with the most income. For instance, the poorest fifth of working families had 8.7% of all income in 1993, but would receive roughly 40% of the gains from a higher minimum wage. In contrast, the best-off fifth of families received 36.1% of all income in 1993, but would obtain only 10% of the benefits of a higher minimum wage.
Conclusion Even though we are completing the fourth year of an economic recovery and unemployment is relatively low these are difficult times for working families. Policy makers should be looking for effective, popular, easy to understand, non-bureaucratic policies to help these families. Raising the minimum wage is such a policy. The modest boost proposed by the Clinton administration will not result in any significant job loss but it will generate concrete income gains for precisely those families who need it most. Bibliography Card, David and Alan B. Krueger. 1995. Myth and Measurement: The New Economics of the Minimum Wage. Princeton, N.J.: Princeton University Press.
Mishel, Lawrence and Jared Bernstein. 1994. The State of Working America 1994-95. Economic Policy Institute Series, Armonk, N.Y.: M.E. Sharpe.
Spriggs, William and Bruce Klein. 1994. Raising the Floor: The Effects of the Minimum Wage on Low-Wage Workers. Washington, D.C.: Economic Policy Institute.