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States move on minimum wage | EPI Issue Brief #195

Issue Brief #195

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States move on minimum wage

Federal inaction forces states to raise wage floor to protect low-wage workers

by Jeff Chapman

The president and Congress are poised to beat an embarrassing record currently held by their predecessors of the 1980s—eight years without raising the minimum wage. Each year the federal government fails to act, minimum wage workers pay the price, as the rising cost of living erodes the value of their paycheck.

The need for a minimum wage increase is clear: a stagnant minimum wage has a significant impact on the earnings of low-wage workers. The last time the federal government failed so badly to meet its responsibility—in the 1980s—states stepped in. Between 1979 and 1989, a period in which the purchasing power of the federal minimum wage fell every year, the number of states with minimum wages higher than the federal level went from one to 15.

States are once again acting to alleviate the impact of federal neglect. Since the federal minimum wage was last raised in 1997, the number of states with minimum wages above the federal level has gone from six to 13, with additional states considering action this year.1 Two states have decided on a longer-lasting solution rather than a one-time increase. Washington state and Oregon now increase their minimum wage moderately each year to keep pace with the rising cost of living.

The 1980s—a decade of decline
For most of the minimum wage’s history, working families could depend on slow but steady growth in the minimum wage. But after it was raised to $2.90 in 1979, the purchasing power of the minimum wage fell for 10 consecutive years (prices rose by an average of 5.1% per year).2 The combination of inflation and government inaction pushed the purchasing power of a minimum wage paycheck lower than it had been in more than three decades.

Partially as a consequence of the stagnating minimum wage, the wages of low-wage workers fell significantly during the 1980s. A number of studies have pointed to the decline in the minimum wage as contributing to falling wages and the rise in wage inequality during this period.3

Because the earnings of low-wage women are particularly tied to the minimum wage, the decline in real (i.e., inflation-adjusted) wages was particularly pronounced among female workers. Women made up 58.2% of the workers directly affected by the 1996-97 increase in the minimum wage, but only constituted 47.7% of the total workforce (Bernstein and Schmitt 1998). While the inflation-adjusted median wage of female workers ages 18 to 64 grew by 8.4% from 1979 to 1989, the wages of the bottom 20% of women fell dramatically—Figure A shows the decline in the 10th and 20th percentiles during this period. The decline in the minimum wage affected a substantial share of women workers; by 1989, 23.1% of women workers age 18 to 64 earned less than the value of the 1979 minimum wage, adjusted for inflation. For a woman working full time, year-round, the decline in the minimum wage would equate to a loss of income of over $4,000 (in 2003 dollars).4

Figure A

Some states did not stand idle while the federal government allowed the wage floor to slip into the basement. In 1979, only Alaska had a minimum wage set above the federal level (Figure B and Table 1)5; by 1989, 15 states had minimum wage rates above the federal level. The number of states with higher wage floors also grew during periods of federal neglect in the 1990s (see Table 1).

Figure B

Table 1

Figure C shows the decline in value of a full-time minimum wage paycheck since 1979. The value of minimum wage paychecks in Rhode Island and Washington state are also shown for comparison because these two states were among the 14 that raised their minimum wage rates between 1979 and 1989. As shown in Figure C, state action helped ameliorate the impact of federal inaction.6 In 1989, while full-time minimum wage workers in 35 states were earning more than $4,000 less (in 2003 dollars) than they were in 1979, Rhode Island cut the loss of income for these workers by almost two-thirds.

Figure C

The 1990s—continued neglect
The federal government raised the minimum wage in two steps in 1990 and 1991 and then again in two steps in 1996 and 1997. These increases, however, were inadequate to make up for the previous decade of decline. In 1998, after the minimum wage had been raised to 86% of its 1979 value, 16.8% of women workers ages 18 to 64 still earned less than minimum wage workers in 1979. Since 1997, there has been no increase to the federal minimum wage. The minimum wage is now 24.5% lower than it was 24 years ago, and it is quickly reaching its 1989 nadir.

Despite the fact that the federal government neglected the minimum wage, the strong economy of the late 1990s boosted the wages of low-wage workers, reversing some of the effects of inflation on the minimum wage. Low unemployment and strong labor demand generated wage increases during these years by providing low-wage workers with greater bargaining power.

Looking ahead
The unemployment rate rose to 6.0% in April 2003, up from 3.8% just three years ago. While the momentum of the strong labor market held wage growth steady into the recession, there are now signs that the recession and jobless recovery are affecting wage growth. The persistence of high unemployment (over 5% for 19 straight months) has caused the inflation-adjusted earnings of the typical full-time worker to fall for the last four quarters (Bernstein 2003).

Few expect a quick return to the tight labor market of the late 1990s. In the Bush Administration budget for fiscal year 2004, the Office of Management and Budget predicts that unemployment will remain above 5% through 2008. This weaker labor market is unlikely to provide the bargaining power required for low-wage workers to negotiate a fair wage for their labor, making a solid wage floor even more important. There have been attempts to raise the minimum wage to $6.65, but Congress has continued to fail to act on these proposals.

A long-term solution
The minimum wage is unusual among federal policies in that its value is not held constant over time. For example, since 1975 Social Security benefits have been adjusted for changes in the cost of living. Were Social Security benefits like the minimum wage, the living standards of survivors, the retired, and disabled persons would rise and fall according to congressional action (or inaction).

In Washington state and Oregon, annual increases in the minimum wage are tied to increases in the cost of living. For example, if prices rise by 2% from 2002 to 2003, then the minimum wage in all three states will be 2% higher in 2004 than it was in 2003. This keeps the actual purchasing power of the minimum wage constant. Figure C shows how the Washington minimum wage has held steady since 2000.7

In 1998, voters in Washington state overwhelmingly passed a ballot initiative that linked the level of the state minimum wage to rising costs. Since 2000, the buying power of the minimum wage in Washington has been frozen at a level slightly above the 1979 value (although still below the minimum wage’s peak in 1968). In 2002, Oregon voters followed Washington’s lead. Thus far in 2003, bills to set automatic annual increases to the state minimum wage have also been introduced in California, Illinois, Massachusetts, Rhode Island,
and Vermont. “Indexing” the minimum wage to inflation is an act of prevention rather than a cure. While the increases in state minimum wages in the late 1980s helped reverse some of the decline in the federal minimum wage for workers in those states, freezing the value of the minimum wage to the 1979 value could have prevented the need to reverse the decline.

Small annual increases may also be preferable for businesses when compared to irregular moderate increases because they occur in smaller increments and are more predictable. Citing this reason, Massachusetts Republican gubernatorial candidate Mitt Romney joined his Democratic opponents by announcing his support for an indexed minimum wage. Now-Governor Romney said during the campaign, “I do not believe that indexing the minimum wage will cost us jobs. I believe it will help us retain jobs” (Ebbert 2002).

The decline of the federal minimum wage over the last 24 years has had a significant negative impact on the incomes of low-wage workers and their families. While states have historically stepped in where the federal government has failed, it has often been a case of too little too late. Washington state and Oregon have ensured that the wages of the lowest-paid workers in those states will keep pace with the rising cost of living. As other states look for a way to help workers during a time of great need and budget crises, they should consider following the lead set by these states.

EPI’s living standards program gratefully acknowledges the support of the Charles Stewart Mott Foundation, the John D. and Catherine T. MacArthur Foundation, the Foundation for Child Development, the Public Welfare Foundation, the Rockefeller Foundation, and the Joyce Foundation. Research assistance was provided by Yvon Pho and Brendan Hill.

The Consumer Price Index

Both states that currently have automatic annual increases use the Consumer Price Index (CPI) to guide the adjustment. The CPI, which is used widely by business, labor, and government leaders, is a measure of the average change in the price of a fixed basket of goods and services. The CPI also affects the incomes of almost 80 million people as a result of statute, the price of school lunch for 26.7 million children, and the wages of over 2 million U.S. workers who have collective bargaining agreements that tie their wages to the CPI. The CPI is also used to adjust federal and state income tax structures.

The CPI is calculated for two different population groups: All Urban Consumers (CPI-U) and Urban Wage and Clerical Workers (CPI-W). The CPI-U is based on the expenditures of all families living in urban areas. This represents about 87% of the population.

The CPI-W is based on a subset of the CPI-U population—families with more than half of their income coming from clerical or hourly wage occupations. There can be small differences between the two over short periods of time, but in the long term they are very similar. Washington state uses the CPI-W to calculate the annual adjustment to their minimum wage and Oregon uses the CPI-U.

Source: Bureau of Labor Statistics.

1. This includes Illinois, where a bill to raise the state minimum wage to $6.50 has recently passed both houses of the legislature and is awaiting the governor’s signature.

2. The minimum wage increased from $2.90 in 1979 to $3.10 in 1980 and then to $3.35 in 1981. However, because inflation was so high in these years, the real value of the minimum wage fell.

3. See, for example, Spriggs and Klein (1994) on the impact of the minimum wage on wage levels and Lee (2000) for a discussion of the impact of the minimum wage on wage inequality.

4. Using the Congressional Budget Office projection of 2.3% inflation for 2003.

5. This does not include Connecticut, where the state minimum wage was one cent above the federal rate in 1979. Until 2003, Alaska’s minimum wage was set at 50 cents above the federal, so the decline in the federal minimum wage also meant a decline in the Alaska minimum wage. Currently, the Alaska minimum wage is $7.15, and will be automatically adjusted to remain at least $1.00 above the federal if the federal rate rises.

6. Low-wage employers inevitably claim that increasing a state minimum wage will have harmful impacts on employment. However, this is generally not backed up by empirical research. For example, Card and Krueger (1995) studied the 1988 California minimum wage increase and concluded that “the evidence from California shows that the increase in the state minimum wage had a significant impact on wages, but no large or systematic impact on employment.”

7. Because Figure C uses the annual average CPI-U and Washington links its minimum wage to the change in the August CPI-W, Figure C does not show a perfectly flat value (see inset for details on the CPI).

Bernstein, Jared. 2003. “Jobless recovery catches up to wages.” Economic Snapshots. Washington, D.C.: Economic Policy Institute, April 30.

Bernstein, Jared, and John Schmitt. 1998. Making work pay: the impact of the 1996-97 minimum wage increase. Washington, D.C.: Economic Policy Institute.

Card, David, and Alan Krueger. 1995. Myth and Measurement: The New Economics of the Minimum Wage. Princeton, N.J.: Princeton University Press.

Ebbert, Stephanie. 2002. Romney proposal links wage to inflation. Boston Globe, July 25.

Lee, David S. 1999. Wage inequality in the United States during the 1980s: rising dispersion or falling minimum wage? Quarterly Journal of Economics. Vol. 114, No. 3, pp. 977-1023.

Spriggs, William, and Bruce W. Klein. 1994. Raising the Floor: The Effects of the Minimum Wage on Low-Wage Workers. Washington, D.C.: Economic Policy Institute. 

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