Commentary | Economic Growth

Millions of workers will benefit from minimum wage increase

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On July 24, the federal minimum wage will increase 10.7% to $7.25 per hour, a raise that is good for the economy, good for the country’s poorest workers, and long overdue.

At the macroeconomic level, EPI research shows, increasing the minimum wage serves as a valuable stimulus, significantly boosting consumer spending.
EPI policy analyst Kai Filion recently calculated that the upcoming increase will generate $5.5 billion in consumer spending over the next 12 months. At a time that lawmakers are debating the need for a second stimulus plan to augment the $787 billion one approved last winter, putting a little extra money into the wallets of millions of workers with limited disposable income serves as an effective stealth stimulus.

From the perspective of individual and family incomes, the upcoming hike, while a welcome step in the right direction, will still leave the country’s lowest-paid workers earning a salary at or below the poverty line.

An individual earning $7.25 an hour in a standard 2,000-hour work year would earn an annual income of $14,500-still slightly below the 2009 federal poverty level of $14,570 for a family of two. EPI’s family budget calculator, moreover, shows that families in many regions of the country require significantly more than those federal poverty guidelines suggest, just to get by.

Critics often counter that most minimum wage jobs are held by middle-class teenagers working part-time jobs to earn spending money rather than to put food on the table. But the data offer a different picture. EPI economist Heidi Shierholz finds that more than three-quarters of the workers who will be affected by the wage hike are 20 years old or older and more than half live in a family where the total family income is less than $35,000.

The wage increase set to take effect later this month is the third in a series of increases over the past two years, which raised the minimum wage to $5.85 per hour in July of 2007 and to $6.55 per hour last July. However, that hike is not as hefty as it looks. Since many workers live in states where the minimum wage is already higher than the federal cap, the “effective” minimum wage, which is a population-weighted average of the federal minimum wage and any higher state minimum wages, will rise from a current level of $7.71 to $7.46, an increase of about 4%.

Those attempting to assess the impact of higher wages might focus on one of the trends on which most economists agree: wage stagnation. In recent decades, wages of low- and middle- income workers have failed to keep up with overall growth in productivity. For workers earning the minimum wage, even after the upcoming increase takes effect, their incomes will still be about 18% below the real value of minimum wage in 1968. Rather than getting ahead on July 24, they will only be partially catching up. Workers need to have the opportunity to grow their incomes in tandem with the economy, so they can earn a living wage from their jobs and not have to rely excessively on income from assets such as stocks or housing, which are often not sustainable.

One final piece of good news is that the wage hike affects more than the 2.8 million workers earning below the federal minimum wage. An additional 1.6 million workers who currently earn only slightly more than $7.25 an hour will likely see an increase too, as employers maintain internal wage ladders. This could serve as additional stimulus, further increasing the buying power of more Americans and putting more money back into the economy.