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Snapshot for July 19, 2004

Higher minimum wage most helps low-earning households

Because payment of the minimum wage is not formally tied to total family income, some opponents of the policy raise concerns that it is poorly targeted, that is, some who benefit from the increase don’t actually need a raise. The data show, however, that those who benefit the most will be low-income working families.

An increase in the minimum wage is highly effective at improving the lot of lower-earning households. For example, the New York state legislature is currently considering an increase in the minimum wage from $5.15 to $7.10 an hour. As shown in the figure below, although the bottom 40% of households earn only 15% of total wages in New York, they would receive 58% of the benefit from the minimum wage increase. These households have average weekly earnings of only $414, and a boost in the minimum wage would provide a meaningful improvement for many of these families’ quality of life.

Nevertheless, from a policy perspective, the minimum wage should not be judged solely on the basis of its efficiency at “hitting a target” (i.e., the extent to which it reaches low-wage workers in low-income families). The minimum wage is designed to impose a wage floor on the labor market, below which covered workers cannot legally be paid. Its purpose, as conceived by its original framers in the Roosevelt Administration and as stated in the Fair Labor Standards Act, is to prevent employers from driving the wage of the least skilled down below a level deemed to be minimal. The government says, in effect, that it doesn’t want the people in this country, regardless of their background or economic circumstances, to be paid less than an amount that adequately honors their effort. Given the weak bargaining power of low-wage workers, this aspect of the policy remains as relevant as ever.

Today’s Snapshot was written by EPI economist Jeff Chapman.