Discussion
A minimum wage is the lowest wage that can legally be paid to employees. The minimum wage is designed not only to raise the earnings of low-income workers, but to establish a floor for the low-wage labor market. Ideally, the low-wage floor should be high enough to keep all full-time workers, regardless of their position in the labor market, above the poverty line.
Unfortunately, the
Fair Labor Standards Act (FLSA), which first established the federal minimum wage in 1938, has two serious limitations. First, it is an arbitrary dollar amount. It bears little relationship to any measure of need—of what it takes for a family to pay for basic necessities in the United States—such as the official federal poverty line or other measures used in a variety of federal programs. For most of the history of the minimum wage, the dollar amount that Congress has set has been insufficient—assuming an employee works full-time and year-round—to get above the poverty line, much less more realistic measures of need.
The second problem with the FLSA is that it failed to include automatic adjustments for cost of living. Only occasionally has Congress built in “step increases” in the value of the federal minimum wage. As a result, the real value of the federal minimum wage tends to decline as a result of inflation. Prior to 2007, it had been more than a decade since the last minimum wage increase—the longest span without an increase in the history of the federal minimum wage. During this time, the real value of the minimum wage fell 29 percent. Prior to the recent minimum wage increase, the real value of the minimum wage was only 61 percent of what it was at its peak in 1968. Even with the 2009 increase in the federal minimum wage to $7.25, the real value of the federal low-wage floor will be only 84 percent of the 1968 peak real value at $8.65 in today’s dollars. Without indexing the minimum wage to inflation, this small gain will quickly begin to slide.
Every state can legally set a minimum wage that is higher than the federal minimum (now $6.55 per hour and set to increase to $7.25 per hour in July of 2009). Many states have done exactly that, setting their own minimums as high as $8.55 per hour. Most states require new legislation to raise the minimum wage, but in at least one state (Wisconsin), the executive branch can raise the state’s minimum wage under existing law.
The Economic Policy Institute’s briefs on the
impact of the minimum wage and the
importance of indexing describe how states that have set higher minimum wages haven’t suffered job losses, but they have made it possible for their hard-working residents who can only find minimum-wage jobs to get much closer to—or even above—the poverty line.
Once the state’s minimum wage is set at an acceptable level, indexing it for the cost of living allows the wage’s real value to remain constant over time.
Indexing helps:
1) Maintain minimum wage purchasing power.
2) Make wage levels more predictable for workers and employers alike.
3) Keep workers’ economic security separate from the contingencies of partisan debate.
Costs
As shown by recent state-level studies, raising the minimum wage produces gains while imposing only relatively small costs on governments and private businesses. The net economic impact of reasonable minimum wage increases is overwhelmingly positive.
According to two studies from the Center for American Progress on minimum wage proposals in
Arizona and
Florida, a state’s own operating costs will rise slightly, following an increase in the minimum wage, as a result of (1) increased employee wages, (2) costs passed on to the state through suppliers forced to pay higher wages, (3) increased administrative costs associated with implementation, and (4) a potential loss of business income taxes due to lower business profit margins. States will ultimately experience net savings, however, as a result of increased income tax revenue, increased sales tax revenue, and lower public health care costs.
Private businesses will experience somewhat greater costs as a result of a minimum wage increase, but such costs are still very slight. A
2004 study of the minimum wage in Florida found that on average, a $1 minimum wage increase would cost private businesses in Florida less than 0.04 percent of their total sales. A
2006 study of the minimum wage in Arizona examined the potential effects of a $1.60 increase in the minimum wage. It found that, on average, the increase would only cost private businesses 0.08 percent of their total sales. Businesses should be able to recoup these losses through marginal price increases.
More than offsetting these marginal costs, businesses will experience important gains. Workers who receive a minimum wage increase are likely to be more committed to their jobs and, as a result, be more productive. For firms, this increased worker productivity means lower operating costs, greater sales, and thus net revenue gains. In addition, a minimum wage increase gives low-income workers more disposable income, the great part of which they will spend in local stores or otherwise within the state’s economy, thus increasing sales for state companies.
Indexing the minimum wage would have no effect on the types of costs or benefits discussed above; it just keeps them constant.
Public Perception
Since the most recent federal minimum wage increase took effect on July 24, 2008, it is too soon to tell whether most Americans have an opinion on the current minimum wage. In 2006, however,
Pew public opinion research revealed
overwhelming support for increasing the minimum wage (see Chart 1). Not only did 83 percent of respondents favor raising the minimum wage by $2.00 to $7.15 per hour, but there proved to be a strong majority of support across the political, socioeconomic, demographic, and geographic spectrum.
Chart 1: Support for Federal Minimum Wage Increase
Most notably, 91 percent of Democrats, 87 percent of Independents, and 72 percent of Republicans favored the proposal. Furthermore, support for a minimum wage hike has progressively increased over the last decade. In 1998, just one year after the last minimum wage increase, roughly 4 out of 5 respondents favored increasing the minimum wage, suggesting that support for further increases is still likely to be high, regardless of the recent change.
Talking Points
Won’t increasing the minimum wage also increase unemployment by effectively pricing low-wage workers out of the labor market?
Economists believed for a long time that raising the minimum wage negatively affected employment (the so-called “disemployment” effect). This assumption largely rested on a series of studies that used what has since been shown to be a flawed methodology. More recent work consistently rejects the “disemployment” effect and actually suggests that increasing the minimum wage has a positive influence on outcomes in the low-wage sector of the labor market.
Won’t increasing the minimum wage inhibit economic growth by encouraging businesses to locate or relocate in states with less costly minimum wage laws?
State-level studies show that businesses are generally able to absorb costs associated with minimum wage increases. Consequently, these studies suggest that states are unlikely to experience negative relocation effects. A 2006 report from the
Economic Policy Institute indicates that states that have enacted minimum wage increases have actually tended to perform better on a range of economic measures including unemployment, retail and small business job growth, and aggregate job growth.
Will increasing the minimum wage really help those that need help the most?
Minimum wage employees are often stereotyped as middle-class teenagers. This belief is largely unfounded. Nearly half of those workers who would benefit from a minimum wage come from poor or near-poor families. Forty-eight percent of minimum wage workers are their household’s primary breadwinner according to a
Center on Budget and Policy Priorities. Increasing the minimum wage clearly produces large gains for families struggling to make ends meet. Research from the
Economic Policy Institute suggests that 63 percent of the gains from a $1 increase in the minimum wage would go to households in the bottom 40 percent of the income distribution with nearly 44 percent of gains going to households in the bottom 20 percent of the income distribution.
Who Else Is Doing It?
While the federal government has lagged in helping low-wage workers earn enough to live on, state governments have begun to step up. Many states mandate minimum wage rates well above the federal standard. Moreover, some states have indexed their minimum wage to keep up with the cost of living.
Before the July 24, 2008 federal minimum wage increase, the
Economic Policy Institute reported 26 states had a minimum wage above the federal minimum. However, the three annual step increases for the federal minimum wage approved by Congress in 2007—that is, an increase to $5.85 per hour on July 24, 2007, to $6.55 per hour in July 2008, followed by a step up to $7.25 per hour in July 2009—means that, by the summer of 2009, only 12 states (shown below) are projected to provide a minimum wage above the federal level: California, Colorado, Connecticut, Illinois, Massachusetts, Michigan, New Mexico, Ohio, Oregon, Rhode Island, Vermont, and Washington
. Ten states currently index their minimum wage: Arizona, Colorado, Florida, Missouri, Montana, Nevada, Ohio, Oregon, Vermont, and Washington.
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States with Minimum Wages Projected to be Above the Federal Level
and/or Indexed to Cost of Living Adjustments on 7/24/09
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State
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Wage
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Indexed
|
State
|
Wage
|
Indexed
|
|
Arizona
|
$7.25
|
√
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Missouri
|
$7.25
|
√
|
|
California
|
$8.00
|
|
Montana
|
$7.25
|
√
|
|
Colorado
|
$7.28
|
√
|
Nevada
|
$7.25
|
√
|
|
Connecticut1
|
$8.00
|
|
New Mexico
|
$7.50
|
|
|
Florida
|
$7.25
|
√
|
Ohio
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$7.30
|
√
|
|
Illinois2
|
$8.00
|
|
Oregon
|
$8.40
|
√
|
|
Maine3
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$7.253
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|
Rhode Island
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$7.40
|
|
|
Massachusetts
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$8.00
|
|
Vermont
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$8.06
|
√
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|
Michigan
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$7.40
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|
Washington
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$8.55
|
√
|
|
|
|
|
BOLD
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Means states projected to have minimum wages higher than the federal level on July 24, 2009.
States enacted new minimum wages higher than the federal level on or after Jan. 1, 2006.
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|
√
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Means that the minimum wage in these states is annually adjusted to reflect the cost of living.
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1
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Connecticut will increase to $8.25 on January 1, 2010.
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2
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Illinois will increase to $8.25 on July 1, 2010.
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3
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Maine will increase to $7.50 on October 1, 2009.
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Note:
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Updated November 2008 by Center for State Innovation
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Spotlight on Innovation
Washington:
Washington is the clear leader on minimum wage policy. It boasts the highest minimum wage in the country at $8.55
per hour and it is one of only 10 states that indexes their minimum wage.
What Can You Do?
Increasing the minimum wage usually requires legislative action (
model legislation can be obtained from CSI). It is important to note that without indexing, minimum wage increases will only have a temporary effect. The federal example is telling—in the absence of indexing, the real value of the minimum wage has dropped by more than a third since it reached its peak in 1968.
Setting a State Minimum Wage to Make Work Pay
In determining a new level for the minimum wage, state executives should consider a policy of choosing a minimum wage dollar amount that in combination with the federal Earned Income Tax Credit (EITC) and any applicable state EITC gets a full-time, year-round worker a total “earnings-related” income above poverty line. In other words, the state’s minimum wage should not operate in isolation. It should interact with the federal EITC, any applicable state EITC, and perhaps other state policies to produce a total policy of “making work pay.” To make sure that any increase in the state’s minimum wage does indeed result in “making work pay,” state executives should keep in mind the following formula: Earnings at the new state minimum wage (assuming full-time, year-round work) + federal EITC + any state EITC > Federal Poverty Line).
Indexing the Minimum Wage so that Work Continues to Pay
There are a number of available indexing strategies:
1) Subject your minimum wage to an annual cost-of-living adjustment.
2) Link your state’s minimum wage to some form of Consumer Price Index (e.g., CPI-U, CPI-W).
3) Link your state’s minimum wage to the average or median wage in your state.
A number of states currently rely on either the first or second strategy, both of which are intended to help ensure that minimum wages adequately reflect what it costs for working families to make ends meet. The third strategy works somewhat differently. Rather than focusing on the cost of living, the third approach is designed to reduce inequality in the labor market by making the minimum wage equal to a proportion of the average or median wage in the state. This limits the extent to which low-wage earnings can slip relative to the prevailing market wage.
Resources
Policy Reports
Opinion Polls
State Programs