Report | Jobs and Unemployment

Raising the Minimum Wage to $7.25 is an Important First Step

Policy Memo #118

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For years, Democrats in Congress concerned about the struggles faced by low-wage workers have been trying to raise the federal minimum wage, which has been stuck at $5.15 an hour since 1997. For nearly two years, for example, Senator Edward Kennedy and Rep. George Miller have championed a bill to gradually raise the wage floor to $7.25 an hour by 2009, a change that is sorely needed and long overdue.

The new Speaker of the House and Senate Majority leader have pledged to pass this minimum wage bill in the first days of the new Congress, but there is a major obstacle in their path. Even though President Bush has signaled some willingness to consider an increase, the price of his cooperation, in tax breaks for business, for example, is not clear. And Republican House leaders say the minimum wage is “an issue ripe for compromise.”

No it’s not. There is, in fact, no room to compromise on a minimum wage increase that has been delayed for nine years, to a level that will lift the earnings of less than half of the low-wage workforce. Before they consider trade-offs to win approval of a raise to $7.25, the new Congress needs to know just how modest this increase is. 

First, inflation since the bill was introduced in early 2005 has already eroded some of the purchasing power of the proposed raise, and $7.25 today buys about 40 cents less than it did in January 2005. That’s why after Congress passes a raise to $7.25 it should continue to push for a minimum in the neighborhood of $8.00 by 2009 in order to preserve the purchasing power of that January 2005 target. Second, no matter what the amount of the next raise, inflation will start wearing it away, bit by bit, as soon as it is in place. Once the minimum has been raised to an appropriate and fair target wage, Congress needs to follow the lead of 10 states and add indexing to prevent the minimum wage from being eroded by inflation.

There is nothing “magical” about $7.25—we cite it here because it is the level currently under discussion. However, policy makers need to take account of the passage of time since this level became an agreed upon target. The 10th percentile wage (10% of the workforce earns less; 90% earns more) is already just about $7.50. We estimate that the 1996 and 1997 increases directly affected 9.9 million workers. The proposal Congress is considering will directly impact only 5.6 million, though millions more will be affected indirectly.
 
The Democrats’ slim margins in Congress make even this first step toward a fair minimum wage legislatively difficult. But knowing how modest their proposal really is should stiffen their resolve when business interests and Republicans push back. Business owners have been served several large helpings of tax cuts since 1997, after all, while minimum wage workers have been kept waiting at the back of the line. 

It is critical that policy makers reset the wage floor to a meaningful level that will help our lowest paid workers benefit from the growing economy that their work helps to create. Once they have passed the bill they have promised, the Democrats should come back quickly with the rest of what is needed. We suggest a raise to at least $8.00 an hour in mid-2009, with 50% of the national average wage for production, non-supervisory employees as the ultimate target to ensure that the wage floor never drops out from under working Americans again.


See related work on Wages Incomes and Wealth

See more work by Jared Bernstein