Millions of workers are paid less than the ‘average’ minimum wage

Last week, the New York Times published an article in “The Upshot” by Ernie Tedeschi, which argues that after accounting for state and local minimum wages, the United States currently has its highest average effective minimum wage ever at $11.80 per hour. The article correctly underscores how after 10 years of inaction at the federal level, so much of the policy work being done to boost wages for low-wage workers is happening at the state and local level. Yet, it is important to recognize that even with state and local governments taking action in many places, there are still millions of workers being paid significantly lower wages than the “average” minimum wage as calculated in the Upshot piece. In fact, raising the federal minimum wage to $11.80 would directly lift wages for 18.6 million workers, or 12.8 percent of the wage-earning workforce. Moreover, calculating the average effective minimum wage is very sensitive to how one defines the workforce affected by the policy. One would arrive at a much lower average minimum wage if considering the broader low-wage workforce for whom minimum wage policy is relevant.

The Upshot piece explores how the share of workers being paid exactly the federal minimum wage is relatively small. There are two reasons why this is the case. First, the article observes that 89 percent of minimum-wage workers are paid more than the federal $7.25, because 29 states and some 40+ cities and counties have set their own minimum wages above the federal floor. Higher state and local minimum wages—all of which can be found in EPI’s Minimum Wage Tracker—are the result of federal inaction and also due to the tremendous success of the Fight for 15 movement in raising awareness about low wages and pushing for minimum wage increases across the country.

Second, the share of workers being paid the federal minimum wage potentially overlooks millions of workers in states with low minimum wages who are earning only somewhat above the required federal minimum. For example, in Texas, a state stuck at the federal minimum wage, 2.7 percent of workers reported earning less than $7.50 per hour last year. But four times as many workers in Texas, or 11.0 percent, earned less than $10.00 per hour. This contrasts sharply with California, where there are higher state and local minimum wages: there, only 3.8 percent of the workforce reported earning less than $10.00 per hour last year. (These calculations use Current Population Survey data.)

This raises some important questions about how the average minimum wage should be calculated. The Upshot article’s methodology states that $11.80 is the average minimum wage “weighted by the usual labor hours of minimum wage workers at nonfarm wage and salary jobs paid hourly.” However, because minimum wages influence wage levels for more than just those workers right at the statutory minimum, we can instead calculate the minimum wage faced by the entire labor market (not just those earning exactly the minimum wage). The employment-hours-weighted average minimum wage of the entire U.S. workforce is $9.33, substantially below the $11.80 calculated in the Upshot piece.

The reason these numbers are so different is that higher state and local minimum wages will have an outsized influence when limiting the calculation to those workers being paid exactly the minimum wage. Whenever the minimum wage is raised, it compresses the lower end of the wage distribution, creating a spike in the number of workers earning the new minimum wage. This means that, all else being equal, there is always going to be a larger share of workers who are minimum wage workers in areas that have adopted higher minimum wages. As a result, when calculating the average minimum wage weighted by employment at the minimum wage, San Francisco’s $15 minimum wage would likely be weighted more heavily than Texas’ $7.25 even if Texas has more workers paid a wage only slightly above its legal minimum.

A better way to measure the extent of low wages, despite state and local minimum wage hikes, is by considering how many workers would be affected if the federal minimum wage were raised to the average value identified in the Upshot piece. Using EPI’s minimum wage simulation model, we estimate that if the federal minimum wage were raised to $11.80, it would directly lift wages for 18.6 million workers (12.8 percent of the wage-earning workforce.) In other words, simply raising the minimum to the Upshot-calculated average of $11.80 would significantly raise the pay of millions of workers held back by low minimum wages in states and localities throughout the country. Moreover, raising the federal minimum wage to $15 by 2024 would lift pay for nearly 40 million workers, including millions across the country who haven’t benefited from a higher state and local minimum wage. Low statutory minimum wages and low wages actually paid to workers are much more prevalent than the Upshot-calculated average suggests and the best way to address this is by raising the federal minimum wage.