Commentary | Economic Growth

Minimum wage anniversary: Still helping millions of workers get by, but just barely

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On each July 24th for the past three years, the federal minimum wage increased by $0.70. The last step of this three-part increase brought the minimum wage to $7.25 in 2009. One year later, we can now look at the data and see how this has had an impact on the economy. We find that the federal minimum wage is helping more than 5 million workers make ends meet, and 2.4 million of these workers’ children depend on their earnings. The benefits of these increases went to low-income workers, who are most likely to put the money back into the economy. Finally, these increases provided a large stimulus to the economy at a time when this was desperately needed.

The federal minimum wage was first established in the Fair Labor Standards Act of 1938. Since then, Congress has periodically increased the minimum wage as prices in the overall economy increased. In 2006, before the most recent three-part increase, the federal minimum wage was $5.15, the same level it had been for the previous 10 years. Because Congress had ignored the minimum wage for such a long time, inflation eroded much of its purchasing power. Adjusting for inflation, the minimum wage in 2006  was worth less than at any other time in the previous 50 years. Congress finally acted in 2007 to help low-wage workers, and passed a three-step increase to the federal minimum wage. The first increase to $5.85 took place on July 24, 2007, the second increase to $6.55 on July 24, 2008, and the final increase to $7.25 on July 24, 2009. Although this final step restored some of the purchasing power of the minimum wage, it is still well below the peak of close to $9.00 reached in 1968.

Around 2006, some states began to set their minimum wages above the federal minimum because Congress had ignored it for so long. In places where there is a state and a federal minimum wage, the higher of the two applies. In 2000, only 10 states and the District of Columbia had a higher minimum wage than the federal minimum. By the end of 2007, this increased to 30 states and the District of Columbia. Because of this state level action, the first federal increase in 2007 had a smaller impact than the third one, as the federal minimum wage was “catching up” in these states. There were only 19 states that were affected by the first increase, while the third one had an impact in 31 states. Today, there are only 14 states and the District of Columbia with a minimum wage higher than the federal minimum, with the highest set at $8.55 in Washington state.

In the 36 states where the minimum wage is set at the federal level of $7.25, there are 5.4 million workers who earn at or near the federal minimum wage – about 4.4% of the total workforce in these states. These minimum wage workers include a disproportionate share of historically disenfranchised groups. About 60% of these workers are female, compared to 49% of the overall workforce, and 37% are either African American or Hispanic, compared to 26% in the overall workforce. Almost half of minimum wage workers are in families that earn under $35,000 a year. And the vast majority of this group, about 87%, do not have a college degree. Finally, there are 2.4 million children who depend on the income of these minimum wage workers.

In this recession, the minimum wage has helped to maintain a basic standard of living for our lowest-income workers. Furthermore, research shows that increases to the minimum wage help to stimulate spending in the economy. We estimate that the second and third minimum wage increases boosted consumer spending by a total of $8.6 billion, precisely when the economy needed it most (Filion 2009).

Lately, opponents of the minimum wage have suggested that decreasing it would help to boost employment. This is a terrible idea for a variety of reasons. First, the minimum wage is not high by historical standards – today, the real value of the minimum wage is less than what it was from 1961 to 1981. Second, research on the disemployment effects of the minimum wage give mixed results – many indicate that a small change to the minimum wage would have no impact on employment. Furthermore, even if there is a disemployment effect, it is small and far outweighed by the fact that low-wage workers on average will see a net benefit from most minimum wage increases (Shierholz 2009). Finally, one of the biggest problems during a recession is the decrease in consumer demand – when consumers cut back on spending, employers respond by cutting back on jobs. Reducing the wages of already low-wage workers will only make this problem worse, and will hurt those who are least well off.  

Today, the federal minimum wage is doing a better job of providing workers with a basic standard of living than before the recent three-step increase. However, for many workers, this is not enough. In real terms, the minimum wage is still below the level it reached from 1961 to 1981. The annual income of a full-time minimum wage worker (about $15,000) is almost the same as the poverty threshold for a family of two – in other words, minimum wage workers are barely able to support their families. And because the minimum wage is not adjusted for inflation, its purchasing power is already starting to erode. Finally, a large group of workers aren’t directly covered by the full minimum wage – tipped workers in many states can be paid as little as $2.13 an hour.

One year after the last federal minimum wage increase, we see that this policy is helping those who need it the most. But we can do more. As the economy begins to recover from this recession, there are a few policies that will help to ensure that this growth also benefits those with low-incomes. First, the minimum wage should be set at a level that brings workers out of poverty. Second, the minimum wage should be indexed to wages, so that as workers in the overall economy gain, so do those who earn the least (see Shierholz 2009). And finally, the minimum wage for tipped workers should be increased so that these workers can count on a steady paycheck and their incomes are less vulnerable to the whims of customers.



Notes

Workers who earn “near the minimum wage” are those who earn $7.25 +/- 10%, or between $6.53 and $7.98. Although this range is fairly large, this is intentional because these wage data are self reported, and workers often round off their actual wages.

Regarding workers who earn tips, the law technically requires these workers to earn at least the minimum wage when tips are included. However, in practice this means that a tipped worker’s earnings will fluctuate widely from shift to shift. See Restoring the Minimum Wage for America’s Tipped Workers for details.


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See more work by Kai Filion