Minimum Wage

Recently, a statement was issued, asking Congress to raise the minimum wage, led by “… 664 economists -- including Nobel laureates Kenneth Arrow, Clive Granger, Lawrence Klein, Robert Solow, and Joseph Stiglitz -- called for in a petition put together by the Economic Policy Institute, a liberal think tank based in Washington.”1 No matter what ends up happening with the minimum wage, it is obvious that a great deal of attention has been brought to the issue, particularly with the recent mid-term elections, and that can only be a good thing, as the minimum wage needs to be closely examined. There has long been a debate about the minimum wage in the United States, ever since it was first introduced during the height of the Great Depression. As the debate continues in Congress as to whether or not to raise the federal minimum wage, it is important to look at the minimum wage from several different approaches. First, is the history of the minimum wage and why it was created. Second, there are other programs that the government has created to help the so-called “working poor”, in addition to a minimum wage. Third, and finally, is how states and individual cities have decided to try to raise the minimum wage on their own, and not wait for the federal government to do so. The minimum wage has had a dramatic effect on employers and workers in the United States and continues to do so to this day. The minimum wage was initially proposed in the United States in 1933, as part of the National Recovery Act, but that was later ruled unconstitutional by the Supreme Court. Several years later, as part of the Fair Labor Standards Act of 1938, the minimum wage was established through the United States at $.25 an hour.2 According to proponents of this law, the main reason that it was created was to protect workers from employers who would otherwise exploit workers and pay them the lowest possible amount, especially during a period of such high unemployment, like the Great Depression. 1 2

Farrell. Compliance Assistance By Law.

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The wage was set at this level because it was determined to be the lowest possible living wage, which is the minimum hourly wage necessary for a person to be able to afford a specified quality or quantity of housing, food, utilities, transport, health care and recreation. In addition, tax breaks were given to businesses, as well as government subsidies, so that the owners of those companies didn’t automatically increase their expenses with no benefits whatsoever. However, opposition felt that the law was unfair to both employers and employees. Some felt that it was unfair for employers to have to pay their employees at a higher wage, even though they had been willing to work for less. At the same time, some believe that there are employees who were relegated to the minimum wage, despite the fact that they had specialized knowledge and experience for their particular job, but when the wage was created, there was no incentive for employers to pay those employees at higher rates. As the minimum wage was raised throughout history, it reached its high point in purchasing value in 1968, when then wage was $1.60 per hour. When taking inflation into consideration, in today’s dollars, that wage would be worth over $9.50 in today’s dollars3. Unfortunately, the wage itself has been set at $5.15 since 1997, which is the rate it is currently at today, and “…from its peak in 1968, the purchasing power of the minimum wage has declined over 36%.”4 Interestingly, inflation has made more of an impact than anything else, as “…since that last minimum-wage hike in 1997, inflation has pushed up most wages to the point that only 0.3% of full-time workers are paid the minimum.”5 The common sense feeling is that most small business owners would oppose any wage hike, though that turns out to be completely untrue. “In a poll of small-business owners released in March by Wells Fargo and the Gallup Organization, 86% of those surveyed said the minimum wage had no effect on them or their hiring

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Farrell. Minimum Wage Graphs. 5 Povich. 4

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practices.”6 Because so few new employees are actually hired at the minimum wage, it doesn’t actually affect how much they are going to be paid, and therefore, doesn’t affect the bottom line of the business owners. There have been several attempts over the past nine years to raise the minimum wage, most of which have been shut down by the Republican-dominated Congress. But, in just looking at the current level of the minimum wage, other things must be taken into consideration. One of the most shocking aspects of the current rate of the minimum wage is that “...during most of the 1960s and 1970s, working at the minimum wage kept a family of three out of poverty. Today, such a family is 24% below the poverty level.”7 This is something that really needs to be taken into consideration when looking at the minimum wage, as to put that many people below the poverty level is simply unacceptable, especially when it comes from a government whose job is to serve the people. Some opponents of raising the minimum wage argue that raising the wage will only help teenagers, who make up the majority of minimum wage workers. While they do make up the majority of minimum wage workers, there is a simple solution to this objection – setting wage scales in accordance with age, meaning that teenagers would be capped at a lower rate than older people.8 It would be very unlikely that anyone would object to having different minimum wages for people in their twenties and up than teenagers, and it would make a major difference for those who actually rely on the minimum wage to live. While it is ludicrous to say that the minimum wage is supposed to provide a comfortable living for anyone, it is also supposed to be able to provide at least a basic living wage for someone. Currently, if someone works 40 hours a week, for 52 weeks a year, at the minimum wage, they will earn $10,712, before paying into Social Security and income tax. If this person lives in a state where there are state income taxes, and they have to pay federal income tax, they would take home 6

Farrell. Minimum Wage Graphs. 8 Easterbrook. 7

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less than $8,000, which is all they would have to live on. When broken down, that would mean that they would have approximately $150 to spend each week, on food, housing, clothing and health care, not to mention transport. 9 Of course, this is not taking other programs into consideration. The government does have one program that has been dramatically successful in helping those people who do not earn a great deal of money, called the Earned-Income Tax Credit, or the EITC. This refundable tax credit reduces or eliminates the taxes that are paid by low-income working people, including payroll taxes. This is often used as a wage subsidy for low-income workers, and it can contribute a large amount of money to those who do not earn a great deal of money.10 Created in 1975, the EITC is one of the rare programs that enjoys support from both Republicans and Democrats, and it has been expanded four times, once with each major tax bill that was passed over the last thirty years.11 This is by far the most successful program created to help the poor in the United States since the time of the Works Progress Administration, during the Great Depression. “For instance, the EITC is credited with increasing the labor force participation rate of single mothers with children following welfare reform. And it lifts more children out of poverty than any other government program, according to research by economists Nada Eissa of Georgetown University and Hilary Hoynes of the University of California at Davis.”12 The EITC is responsible for reducing more poverty than any other program in the United States, issuing over $36 billion in refunds to 21 million American families in 2004.13 President Ronald Regan once called the EITC the “…best anti-poverty, the best pro-family, the best job-

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Tax Information For Individuals. EITC Information Page. 11 EITC Information Page. 12 Farrell. 13 EITC Information Page. 10

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creation measure to come out of Congress."

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While that may be a very true statement, this is far

from a perfect program, and it could help more people than it currently does. The EITC is a very complicated credit that has numerous eligibility requirements that can frequently be confusing. In fact, on the web page for the EITC on the IRS’ site, there are a number of questionnaires and requirements that must be looked at and fulfilled in order to qualify for the credit. In addition, over the past few years, some economists feel that, “…Congressional Republicans more concerned about fraud and abuse in the EITC than with making it an even better anti-poverty program.”15 While fraud and abuse may be a problem in the EITC, the bigger problem is that there are a number of people who qualify for the credit who don’t even apply for it. Research done by the IRS shows that between 3.5 and seven million households who are entitled to the EITC credit did not apply for the credit. This means that those people missed out on anywhere between $6.5 and $12 billion in credits.16 Therefore, making the EITC more accessible to those who qualify for it, and easier to understand must be a priority. Because the benefits to the EITC are not just felt by those who earn the credit, the program must be understood in a broader manner. The money credited to those people who qualify for the EITC is frequently reinvested in local communities, which are frequently populated by small businesses owned by people who may also qualify for the EITC. In helping them, that will continue a cycle that improves the local economy. Though the EITC is far from a perfect program, it has made differences in the lives of a huge number of people, and it is the best anti-poverty program that the federal government currently has. While it would be tremendous if poverty eliminated itself, or if everyone was able to rise above the poverty line, both of those things are highly unlikely to ever happen. Because of this, the 14

Farrell Farrell 16 EITC Information Page. 15

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EITC is the best current solution to supplant the minimum wage and other low-income workers, though it could be much better. As the purchasing power of the minimum wage fell throughout the 1970s and 1980s, there were states that chose not to wait for the federal government to increase the minimum wage. By 1989, fifteen separate states had minimum wages that were above the federal minimum. As time has passed, many more states, and even a number of individual cities have decided to take matters into their own hands and raise their minimum wages. Doing so would automatically override any federal minimum within those states or cities, due, in most cases to the higher cost of living in those locations. States and individual cities have been handling their own minimum wages for quite some time, and while in some cases, they are assigned to specific types of workers, ranging as high as $12.88 an hour in Oxnard, California.17 In many cases, these higher wages are assigned only to certain city employees and contractors, though that may change. “…Robert Pollin, a professor of economics at the University of Massachusetts, says that the new watchword for localities considering hiking their minimum wages is ‘wider coverage’: that is, applying the wage to all workers.”18 Recently, the city of Chicago passed a targeted ordinance that will specifically look to raise the wages of those workers who work for larger stores and companies. If this is able to get past the mayoral veto and other legal loopholes, then the impact could be tremendous. “…The Chicago ordinance forces stores inside the city limits with more than 90,000 square feet and $1 billion in annual parent company revenues to pay a minimum wage of $9.25 per hour plus $1.50 per hour in benefits, effective July 1, 2007. That rises to $10 per hour in wages and $3 per hour in benefits by 2010 and is indexed to inflation thereafter. Stores with less than 90,000 square feet remain subject 17 18

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to the Illinois state minimum wage of $6.50 an hour and can look forward to a huge labor cost advantage over their competitors.”19 While some see this as a purely political move that was specifically targeted at stores like Wal-Mart and Target, proponents of this have argued that it will effectively call on those who are more profitable to give back more. There are similar laws like this enacted in Washington DC already, and if these are able to go through in Chicago, it may be likely that this will continue in other large cities throughout the United States. However, if the federal minimum wage were simply raised, then provisions like this, that are a bit extreme, could be avoided. During November’s mid-term elections, there were six separate states with a minimum wage increase on their ballot, and all six passed, including some by a very wide margin.20 As of January 1, 2007, more than half of the states will have higher minimum wages than the federal minimum, as will hundreds of individual cities and counties.21 What this says is that simply, people believe it is time for a higher federal minimum wage, as they believe that they have to take matters into their own hands to make sure that the lower wage workers are protected. These measures were far from a partisan exercise, as the majority of the states that held these votes were traditionally “Red” states, including Arizona, Nevada and Missouri, while many accuse the Republican party of voting down any measures that would help the working poor or the lower wage workers. Despite all the partisan politics that happen in this country, it turns out that when given the choice, people will choose to help those who need it, even if it raises costs to them slightly. Despite all of the controversy on both sides of the issue of the minimum wage, with all of the available evidence, it is clear that the federal minimum wage needs to be raised. The wage no longer does what it was intended to, which is to provide enough of a wage for unskilled workers to live above the poverty line. While the EITC has made some improvements in the lives of low-wage 19

Hansen Easterbrook 21 State Minimum Wage Rates 20

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workers and given those workers a great deal of money, that is far from a perfect solution. In addition, with the combination of states and cities overruling the federal wage, the wage itself is irrelevant in nearly than half the country. Unfortunately, more time has been spent having politicians debate the issue than actually looking at the people who earn the wage, let alone those who try to live on it. While many people believe that the newly elected Democratic-led Congress will increase the minimum wage, it is unlikely that it will be enough of a change to bring those people who earn the wage above the poverty line, which unfortunately, is a number that keeps increasing.

Works Cited

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Compliance Assistance By Law – The Fair Labor Standards Act (FLSA). . Easterbrook, Gregg. Social Justice Goes Six For Six. . EITC Information Page. < http://www.jcpr.org/eitcinfopage.html >. Farrell, Chris. Raise The Minimum Wage. 19 October 2006. Business Week Online. Hansen, Fay. A Crazy Quilt Of Wage Laws. 28 August 2006. Workforce Management, Vol. 85, Issue 16, p. 41-45. McKnight, Matthew. Mapping The Minimums. Fortune Small Business, September 2006, Vol. 16, Issue 7, p. 16. Minimum Wage Graphs. < http://www.fiscalpolicy.org/MinimumWageGraphs.pdf>. Povich, Elaine S. Who’s Afraid Of The Minimum Wage?. Fortune Small Business, September 2006, Vol. 16, Issue 7, p. 14-16. State Minimum Wage Rates. < http://www.infoplease.com/ipa/A0930886.html >. States Move On Minimum Wage. < http://www.epinet.org/content.cfm/issuebriefs_ib195 >. Tax Information For Individuals. .

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