Earlier this year, EPI released an analysis of the Fair Minimum Wage Act of 2013, a bill introduced by Sen. Tom Harkin (D-Iowa) and Rep. George Miller (D-Calif.) that would raise the federal minimum wage in three incremental increases of $0.95 from its current level of $7.25 per hour to $10.10 per hour (see Cooper and Hall 2013). The Harkin-Miller proposal would then index the minimum wage to inflation, so that as prices rise in subsequent years, the minimum would automatically be adjusted to preserve its real value. At the same time, the bill would raise the base wage paid to tipped workers from the current $2.13 per hour—where it has stood since 1991—in incremental increases over six years until it equals 70 percent of the full minimum wage.

Since that analysis was released, five states have raised their state minimum wages: California, Connecticut, New Jersey, New York, and Rhode Island.1 The increases in these states underscore the broad recognition that the current federal minimum wage is too low. These increases slightly alter our earlier estimates of the impact of a federal minimum-wage increase to $10.10 because workers in these states who would have been affected by the federal increase will now have higher wages as a result of their higher state minimums. Yet the conclusion of our previous analysis remains unchanged: Raising the federal minimum wage to $10.10 by 2016 would lift incomes for millions of American workers and provide a modest boost to U.S. GDP.

This paper provides an update to our original analysis that reflects these higher state minimum wages, and changes in economic conditions over the past year. It begins by providing some context for the current minimum wage and the Harkin-Miller proposal, describing how today’s minimum and the proposed new minimum compare with historical benchmarks. It then provides a demographic overview of the workers who would be affected (both directly and indirectly) by raising the federal minimum wage to $10.10. Finally, it details the GDP and job creation effects that would occur as a result of such an increase.

Key findings include:

• Raising the federal minimum wage to $10.10 by 2016 would return the federal minimum wage to roughly the same inflation-adjusted value it had in the late 1960s.
• An increase to $10.10 would either directly or indirectly raise the wages of 27.8 million workers, who would receive about $35 billion in additional wages over the phase-in period.
• Across the phase-in period of the increase, GDP would grow by about $22 billion, resulting in the creation of roughly 85,000 net new jobs over that period.
• The workers who would receive a raise do not fit the stereotypes of low-wage workers:
  • Among affected workers, the average age is 35 years old, nearly 88 percent are at least 20 years old, and more than a third (34.5 percent) are at least 40 years old.
  • Of affected workers, about 54 percent work full time, about 69 percent come from families with family incomes less than $60,000, and more than a quarter have children.
  • The average affected worker earns half of his or her family’s total income.

The minimum wage in context

Every year that the minimum wage remains the same in nominal dollars, inflation slowly erodes its real (i.e., inflation-adjusted) value, leaving minimum-wage workers with a paycheck that cannot buy as much as it did in years past. This, of course, threatens the material well-being of minimum-wage workers in low-income families who rely on every dollar of income just to afford basic necessities.

At the current federal minimum wage of $7.25, a parent who works full time, year round, does not earn enough to be above the federal poverty line. This was not always the case. As shown in Figure A, throughout the 1960s and 1970s, a full-time, full-year minimum-wage income was above the poverty line for a family of two. At its high point in real value in the late 1960s, a full-time, full-year minimum-wage income was enough to keep a family of three above the poverty line, although it still fell shy of the poverty line for a family of four.

The black dotted line in the figure shows what a full-time minimum-wage worker would earn if the minimum wage were raised to $10.10 by 2016, as the Harkin-Miller bill proposes. Such an increase would return a full-time minimum-wage income to a level sufficient to protect a family of three from poverty. Because the Harkin-Miller bill would also index the minimum wage to inflation, full-time minimum-wage workers would never again fall below this threshold.

The declining real value of the minimum wage has also significantly contributed to the enormous growth in U.S. income inequality (Mishel 2013). The gap between the minimum wage and the average wage of typical American workers used to be much smaller than it is today. Figure B depicts the value of the minimum wage as a percentage of the average wage of production, non-supervisory workers. From the mid-1960s up until the early 1980s, minimum-wage workers earned a wage equal to roughly half that of the typical American worker. Today’s minimum wage is equal to only 36 percent of the average production, non-supervisory worker wage. Raising the minimum wage to $10.10 by 2016 would return the minimum wage to roughly 50 percent of the average production worker wage.

It is important to also recognize that today’s minimum wage has not fallen to exceptional lows out of economic necessity. Over the past 45 years, the U.S. economy has vastly expanded, and productivity (our ability to produce goods and services for the same amount of work) has more than doubled. Yet the minimum wage—our agreed-upon standard for the minimum amount a worker in our society should be paid—has been left to stagnate and decline. Figure C shows the value of the minimum wage since 1968, compared with what it might have been had it grown at the same rate as average wages or total economy productivity (i.e., how much we can produce for an hour’s worth of work).

As the figure shows, the minimum wage in 1968 equaled roughly $9.40 in today’s dollars. Had it grown from that point at the same rate as growth in wages for the typical American worker, it would be about $10.65 today, and projected to be about $10.89 by 2016. If the minimum wage had grown at the same rate as productivity, it would be $18.30 today, and close to $19 per hour by 2016 (under reasonable expectations for productivity growth). As depicted by the dotted black line, the Harkin-Miller proposal to raise the minimum wage to $10.10 by 2016 would lift the minimum to just above its real value from 1968 (in 2013 dollars)—a worthwhile improvement, yet still well below what the economy could sustain, given economic growth and technological progress since that time.

Demographic characteristics of affected workers

Increasing the minimum wage to $10.10 per hour by 2016 would lift incomes for millions of American workers, most of whom do not fit the prevailing impressions of low-wage workers as teenagers working part-time jobs for extra spending money. Figure D shows the number of workers who would be directly and indirectly affected in each year of the proposed incremental increases.

With the initial increase to $8.20 per hour, 7.0 million workers would be directly affected. These are workers who currently earn between $7.25 and $8.20 per hour. Another 2.7 million workers with wages just above $8.20 per hour would be indirectly affected by the “ripple effect” of the increase, receiving a raise as employers adjust their overall pay ladders (Shierholz 2009). In the second year, as the federal minimum wage is increased to $9.15 per hour, 11.1 million workers would be directly affected, and another 6.5 million would be indirectly affected. In the final increase to $10.10 one year later, a total of 27.8 million American workers would see their pay increase, with 16.7 million workers directly affected and another 11.1 million indirectly affected.

We now examine the demographic characteristics—in terms of gender, age, work hours, family income, and family composition—of the workers who would be directly and indirectly affected.

Gender

While raising the minimum wage would benefit both men and women, it would disproportionately affect women. As depicted in Figure E, women account for 49.2 percent of total U.S. employment, yet comprise 55.0 percent of the workers whose incomes would rise by increasing the minimum wage to $10.10. The share of those affected who are women varies somewhat by state, from a low of 47.7 percent in California to a high of 63.3 percent in Mississippi.

Age

Perhaps the most common incorrect perception of low-wage workers is that they are largely teenagers and almost entirely young people. While there certainly are a number of low-wage workers who fit this description, young workers comprise only a small fraction of the workers who would be affected by an increase to $10.10. Of the workers who would receive a raise if the minimum wage were lifted to $10.10 by 2016, only 12.5 percent are teens. In fact, of those affected, more are age 55 or older than are teenagers. The average age among affected workers is 35 years old, more than half of all affected workers are at least 30, and more than a third (34.5 percent) are at least 40 (see Figure F).

Work hours

Among those who would be affected by increasing the minimum wage to $10.10, only 14.2 percent work fewer than 20 hours per week. As seen in Figure G, more than half (53.8 percent) work full time (35 or more hours per week), and 32.0 percent work between 20 and 34 hours per week.

The report’s supplementary state tables (available at http://www.epi.org/files/2013/minimum-wage-state-tables.pdf) provide demographic information on affected workers by state. The data show that Southern states tend to have higher shares of affected workers who work full time. Arkansas (66.1 percent), Louisiana (65.4 percent), Texas (64.0 percent), and Georgia (62.2 percent) have the highest shares, with more than 60 percent of affected individuals working full time. States in New England and the Midwest have the smallest shares of affected workers who work full time, with Connecticut (36.4 percent), Minnesota (38.3 percent), and New Hampshire (39.3 percent) having shares below 40 percent.

Family income

Those who would be affected come largely from families with low to moderate income levels. As shown in Figure H, 68.9 percent of affected workers have total family incomes of less than $60,000 per year, and nearly a quarter (23.1 percent) have family incomes below $20,000 per year. Among all U.S. families, the median family income in 2012 was $62,527 (according to data from the American Community Survey), which means that nearly 70 percent of affected workers come from families in the bottom half of the income distribution.

The share of workers affected by increasing the federal minimum wage to $10.10 with family income below $60,000 varies considerably by state, ranging from a low of 46.9 percent in New Hampshire to a high of 80.2 percent in Montana (and 80.4 percent in the District of Columbia).

Low- and minimum-wage workers are often dismissed as “secondary earners,” implying that the income earned by these workers is primarily discretionary income, unessential to their family’s well-being. This is patently false: The workers who would be affected by increasing the minimum wage to $10.10 earn, on average, 50 percent of their family’s total income. As shown in Figure I, this percentage varies from a low of 32.9 percent in New Hampshire to a high of 60.3 percent in Louisiana.

Family composition

Nationally, more than a quarter (26.5 percent) of those who would be affected by increasing the minimum wage to $10.10 are parents. In fact, of the nation’s roughly 75 million children, nearly one-fifth (18.7 percent) have at least one parent who would receive a raise if the minimum wage were increased to $10.10. This percentage varies from 10.8 percent in Alaska (and 9.7 percent in the District of Columbia) to 25.7 percent in Texas, as shown in Figure J. Including Texas, there are 12 states where more than one-fifth of children have a parent who would benefit from the minimum-wage increase: Idaho (25.0 percent), Arkansas (24.6 percent), South Carolina (24.1 percent), Louisiana (23.3 percent), Kentucky (22.3 percent), North Carolina (21.9 percent), Florida (21.3 percent), Alabama (21.0 percent), Tennessee (20.9 percent), Utah (20.7 percent), and Nevada (20.3 percent). Of these 12 states, all but Idaho, Utah, and Nevada had child poverty rates of 25 percent or more in 2012 (Annie E. Casey Foundation 2013).

Raising the minimum wage to spur economic growth

As explained in our original analysis of the Harkin-Miller proposal (Cooper and Hall 2013), raising the minimum wage would provide immediate benefits not only to affected workers (whose incomes would rise), but to the broader economy as well. Research over the past two decades has shown that, despite skeptics’ claims, modest increases in the minimum wage have little to no negative impact on jobs2 (Schmitt 2013). In fact, under current labor market conditions, where tepid consumer demand is a major factor holding businesses back from expanding their payrolls, raising the minimum wage can provide a catalyst for new hiring.

Economists generally agree that low-wage workers are more likely than any other income group to spend any additional earnings they receive, largely because they must in order to meet their basic needs. Higher-income individuals, corporations, and beneficiaries of corporate profits are more likely to save at least a portion of any additional income. Thus, in a period of depressed consumer demand, raising the minimum wage can provide a modest boost to overall economic activity because it shifts income to workers who are very likely to spend it immediately. Indeed, recent research from the Federal Reserve Bank of Chicago finds that raising the federal minimum wage to $10 could increase U.S. GDP by up to 0.3 percentage points in the near term3 (Aaronson and French 2013).

Our research shows that raising the federal minimum wage to $10.10 by 2016 would provide an additional $35 billion in wages over the phase-in period to directly and indirectly affected workers, who are likely to then spend that additional income. This projected rise in consumer spending would provide a modest boost to U.S. GDP, even after accounting for the increased labor cost to businesses and the potential for small price increases for consumers. Using standard fiscal multipliers, we would expect that increasing the federal minimum wage from $7.25 to $10.10 would generate a net increase in economic activity of $22.1 billion over the phase-in period. This additional GDP would support roughly 85,000 new jobs.4 As shown in Appendix Table 1, increasing the federal minimum wage would generate jobs in every state. (As noted previously, detailed state-level demographic information on each state’s affected workers is available at http://www.epi.org/files/2013/minimum-wage-state-tables.pdf.) Appendix Table 2 details the economic effects of each of the three incremental increases.

Conclusion

Since our original analysis of the Harkin-Miller proposal, five states—California, Connecticut, New Jersey, New York, and Rhode Island—have adopted higher state minimum wages. By 2014, 21 states plus the District of Columbia will have set minimum wages above the federal minimum of $7.25. At that point, roughly half the U.S. workforce will be in jurisdictions with minimum wages above the federal minimum. These increases in these states, along with those in several cities and counties that have also implemented higher local minimum wages, underscore the growing recognition that the federal minimum wage of $7.25 is no longer an adequate wage floor. While these recent state-level increases—particularly California’s increase to $10 in 2015—slightly alter our original estimates, our conclusion remains the same: Raising the federal minimum wage to $10.10 by 2016 would lift the incomes of millions of working families, boosting their spending power at a time when the U.S. economy is in dire need of increased consumer spending.

About the author

David Cooper joined the Economic Policy Institute in July 2011. He conducts national and state-level research on a variety of issues, including employment and unemployment, poverty, the minimum wage, and wage and income trends. He also provides support to the Economic Analysis and Research Network (EARN) on data-related inquiries and quantitative analyses. David has been interviewed and cited for his research on the minimum wage, poverty, and U.S. economic trends by local and national media, including The New York Times, The Washington Post, The Los Angeles Times, U.S. News and World Report, CNBC, and NPR. His graduate research focused on international development policy and intergenerational social mobility. He has a master’s in public policy from Georgetown University.

Endnotes

1. California’s increase is particularly noteworthy: The California state minimum wage will rise from $8 per hour today to $9 per hour in January 2014, and then to $10 per hour in January 2015. Connecticut’s minimum wage will rise to $8.40 in 2014 and $9 in 2015. New York’s minimum wage will be $8 in 2014, $8.75 in 2015, and $9 in 2016. New Jersey’s minimum wage will become $8.25 in 2014 and grow with inflation thereafter. Rhode Island’s minimum wage will be $8 beginning in 2014.

2. It should be noted that the increases proposed under the Harkin-Miller bill are indeed “modest” in size, consistent with past minimum-wage increases. The proposed increases are smaller in percentage terms than the most recent minimum-wage hike in 2007–2009, both when evaluated in nominal or real dollars. In fact, the average of the single-year increases proposed in the Harkin-Miller bill are smaller percentage increases, than the average of all previous minimum-wage increases, both in nominal and real terms. This is true even excluding the increase in 1950, when the minimum wage was raised by 87.5 percent. (See Appendix Table 3.)

3. Aaronson and French’s estimates assume negative job elasticities that they describe as “at the high end of the literature.” They also assume that low-wage employers will pass 100 percent of any increase in labor costs onto consumers. In our view, both of these assumptions are more extreme than we think warranted. Nevertheless, employing them would suggest that even under highly negative assumptions about the potential employer response, increasing the minimum wage would still have a modest positive impact on the economy in the short term.

4. This analysis assumes that a $133,000 increase in economic activity results in the creation of one new full-time-equivalent job in the current economy. Our previous analysis assumed that only $115,000 in new economic activity would generate a full-time-equivalent job. We have revised this number to reflect more recent labor market conditions. For a more detailed explanation of how increasing the minimum wage can boost GDP and employment, and our methodology for estimating these effects, see Cooper and Hall (2013).

References

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American Community Survey. 2012. “Table B19119 – Median Family Income in the Past 12 Months” [generated using American Fact Finder]. U.S. Census Bureau. http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ACS_12_1YR_B19119&prodType=table

Annie E. Casey Foundation. 2013. 2013 KIDS COUNT Data Book: State Trends in Child Well-Being. Baltimore: Annie E. Casey Foundation.

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Cooper, David, and Doug Hall. 2013. Raising the Federal Minimum Wage to $10.10 Would Give Working Families, and the Overall Economy, a Much-Needed Boost. Economic Policy Institute, Issue Brief #357. http://www.epi.org/publication/bp357-federal-minimum-wage-increase/

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Mishel, Lawrence. 2013. Declining Value of the Federal Minimum Wage Is a Major Factor Driving Inequality. Economic Policy Institute, Issue Brief #351. http://www.epi.org/publication/declining-federal-minimum-wage-inequality/

Schmitt, John. 2013. Why Does the Minimum Wage Have No Discernible Effect on Employment? Center for Economic and Policy Research. http://www.cepr.net/documents/publications/min-wage-2013-02.pdf

Shierholz, Heidi. 2009. Fix It and Forget It: Index the Minimum Wage to Growth in Average Wages. Economic Policy Institute, Briefing Paper #251. http://www.epi.org/publication/bp251/

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U.S. Department of Labor, Wages and Hours Division. 2013. “History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938-2009” [chart]. http://www.dol.gov/whd/minwage/chart.htm