Building an Economy that Works for Everyone

Short and sweet: Answers to your questions about the minimum wage

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Photo: 401(k) 2012 via Flickr

With minimum wage bills active in 35 U.S. states and several cities including Seattle, here’s a quick FAQ on the minimum wage.

Who benefits from a minimum wage increase?

Short answer: People earning minimum wage, and near minimum wage.

Longer answer: According to estimates from the Economic Policy Institute (EPI), almost 17 million workers nationwide would see an increase in their wages if the federal minimum wage were to increase from the current $7.25/hour to $10.10. EPI estimates another 11 million workers who earn just above the new federal minimum wage would likely get a pay increase as well.

Who earns minimum wage?

Short answer: Lower-income adults working full-time, many with children. Today’s minimum-wage workers are substantially older and better educated than they were in the past (for example, relative to 1979 or 1968).

Longer answer: Almost 90 percent of minimum wage workers are at least 20 years old; almost 70 percent are in families with incomes below $60,000 per year; over half work full time; and more than one-fourth have children. For complete demographic details, see this recent report by the Economic Policy Institute.

Watch out: The Bureau of Labor Statistics report, Characteristics of Minimum Wage Workers: 2012 doesn’t tell the whole story because it covers only hourly workers who earn exactly $7.25 per hour. Workers now earning $8.00 or $9.00 per hour would receive an increase in pay under many current local and national proposals.

How does raising the minimum wage affect employment?

Short answer: When the increase is modest, there’s little to no effect.

Longer answer: A review of the major research on the minimum wage over the last several decades concludes: “[t]he weight of that evidence points to little or no employment response to modest increases in the minimum wage.” Historically, minimum-wage increases have had only a small to moderate impact on employers — and firms have many ways to adjust to those costs without laying off workers. The most important of these adjustments is a reduction in worker turnover, which saves on hiring and training costs and raises firm productivity.

What do economists think about the idea?

Short answer: Lots more appear to support it than oppose it.

Long answer: A recent letter signed by almost 600 economists, including seven Nobel prize winners and eight past presidents of the American Economic Association, agreed that “In recent years there have been important developments in the academic literature on the effect of increases in the minimum wage on employment, with the weight of evidence now showing that increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labor market.”

Does a minimum wage increase really help low-income workers and their families?

Short answer: It greatly benefits low-income workers and their families; it also helps workers and families with low incomes above the federal poverty line, and even some middle-income families. (That’s a feature, not a flaw!)

Long answer: The Economic Policy Institute analysis noted above notes that almost 70 percent of the benefits of the minimum wage go to workers in families with incomes below $60,000 per year. Over half of the income gains go to workers in families with annual incomes of less than $40,000, and almost one-fourth to families with incomes below $20,000.

A recent, careful paper by economist Arindrajit Dube on the effects of the minimum wage on family incomes and poverty found that increases have a “small to moderate sized impact in reducing poverty” and that the benefits of the policy are concentrated in families in the bottom third of the income distribution. (For a CEPR blog post summarizing Dube’s main findings, click here. For Dube’s own blog summaries of his work, try here and here.)

Wouldn’t it make more sense just to increase the Earned Income Tax Credit (EITC)?

Short answer: The minimum wage and the EITC are strong policy complementsnot substitutes.

Long answer: The EITC is a wage subsidy that benefits both participating workers and employers. Economist Jesse Rothstein has estimated that about 27 cents of every dollar spent on the EITC goes to employers, rather than the low-wage, low-income workers that are the intended beneficiaries.

Longer answer: Employers capture part of the benefits because the EITC has the effect of lowering market wages. The EITC is intended to increase the incentive for working. As a result, it draws more people into the labor market and causes some people to work more hours. This increase in supply, in turn, drives down the market wage (before EITC benefits are paid), lowering employers’ labor costs. With this dynamic in mind, a higher minimum wage can reduce the portion of EITC expenditures that are lost to employers by limiting the degree to which the EITC-induced increase in supply can depress market wages.

How does the value of the minimum wage today compare with the past?

Short answer: Today it’s worth less. How much less depends on (1) what you use as a historical benchmark and (2) how you adjust for changes in prices between the chosen benchmark and the present. No benchmark is perfect, but all of the most commonly used reference levels show the minimum wage is substantially below its historical level.

Longer answer: Economists have used several different approaches:

  • Using the CPI-U: Putting the 1968 value of the minimum wage in today’s dollars using the CPI-U, which was the official procedure in place to measure inflation over that period, the minimum wage in 2013 would have been about $10.75 per hour –almost 50 percent higher than its current value of $7.25. But, the Bureau of Labor Statistics (BLS) has modified the way we measure inflation in the years 1968. If we use today’s procedure and apply it back to 1968, the minimum wage in 2013 would have been about $9.50 per hour –30 percent higher than its current value.
  • Comparing to average worker: Another common benchmark is to compare the minimum wage to what the average production worker made in 1968 (“production and non-supervisory workers” make up about 80 percent of the workforce). In 1968, the minimum wage was equal to 53 percent of the average production worker wage. In 2013, the minimum stood at just 36 percent of the average production worker wage ($20.16). If we round the 53 percent peak down to 50 percent, the 2013 minimum wage would have been just a few cents over $10.00 per hour.
  • Using average productivity growth: Between the end of World War II and the beginning of the 1970s, the value of the minimum wage kept pace with the growth in average productivity (the average value of goods and services produced in one hour of work in the non-farm business sector). From the early 1970s to the present, the minimum wage has trailed far behind productivity growth. If, instead, the minimum wage had continued to grow in line with a conservative estimate of productivity growth after 1968, by 2013, the minimum wage would stand at more than $17.00. (Less conservative estimates of productivity growth suggest even higher levels.)

[With thanks to John Schmitt of CEPR.]

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