December 3, 2013 - American Action Forum
Summary Points
- 78.7% of minimum wage earners are not in poverty.
- 36.6% of minimum wage earners are teens in families that have average earnings in the top 20%.
- Increases in minimum wage would fail to assist almost 99% of all people in poverty.
Introduction
75 years ago the federal minimum wage was crafted during the Great
Depression in response to reports of inhumane child labor in the manufacturing
sector. Today, the minimum wage is often called upon to fight poverty and income
inequality. With renewed calls for an increase in the minimum wage, it is
important to understand the original design, its impact on labor markets, and
ultimately how successful it is as an antipoverty tool.
In his February State of the Union address, President Obama called on
lawmakers to increase the federal minimum wage to $9 per hour and recently
embraced proposals in Congress to increase it to $10.10. State and local
governments have also started to take matters into their own hands. In
September, California Governor Jerry Brown signed into law an increase in the
state minimum wage from $8 to $10 (effective 2016). Recently, New Jersey
residents voted to increase the statefs minimum wage from $7.25 to $8.25 and
amend the state constitution to index minimum wage to inflation. Finally,
residents of SeaTac, home of the Seattle area international airport, are split
on increasing the minimum wage to $15 per hour for all airport employees, with
the ballot initiative only passing by 77 votes.
History
The minimum wage was first introduced by the Fair Labor Standards Act of
1938 (FLSA), and was primarily intended to protect factory workers and children
from harsh working conditions and low pay. The Labor Departmentfs Childrenfs
Bureau found that almost 25 percent of children were working at least 60 hours
per week, with a median weekly wage of only $4.[1]
In todayfs dollars, thatfs only $65 per week or $1.14 per hour if the child
worked 60 hours a week. FLSA imposed harsher restrictions on child labor,
mandated a minimum wage, and imposed a maximum work week of 44 hours for
production employees.
While FLSA mandated a minimum wage to prevent such dangerous child labor
conditions, the initial design of the policy suggests it was never intended to
be completely livable or support an entire family on its own. Todayfs minimum
wage laws are vastly different from the one introduced by FLSA both in terms of
minimum wage level and coverage, and what it is expected to accomplish. In 1938,
FLSA imposed a minimum wage of 25 cents per hour; in todayfs dollars this is
equal to $4.15. FLSAfs minimum wage mandate of 25 cents per hour was also
only for production workers in manufacturing. The law only applied to half of
those production workers and largely excluded all other sectors.[2] Only about 20 percent of the U.S. labor
force was covered by the minimum wage law.[3]
Low-skill industries, such as agriculture, retail, and services were excluded
from the minimum wage requirement due to concerns that it would severely
restrict employment in those sectors.[4] It wasnft until the 1960s and 1970s when lawmakers
extended minimum wage coverage to agricultural, retail trade, and services
industries. By 1975, more than 90 percent of the U.S. workforce was covered by
the federal minimum wage.[5]
States have a long history of requiring their own minimum wages. The very
first minimum wage law in the United States was passed by Massachusetts in 1912,
compliance of which was essentially voluntary. In 1914, Oregon issued the first
mandatory minimum wage, requiring employers in the state to pay women at least
$8.25 per week.[6] Throughout the
20th Century, states began to set their own minimum wages, often due
to lack of action in the federal government.[7]
Today, 19 states and the District of Columbia have higher minimum wages than the
federal mandate, four states have lower minimum wages, five have no minimum wage
law, and 22 have a minimum wage rate equal to the federal $7.25 per hour
requirement.[8]
Minimum Wage Today
Those who advocate an increase in the minimum wage argue that it would be an
effective antipoverty policy and often cite that a full-time worker earning
minimum wage makes $15,080 per year, below the federal poverty line for a family
of two. However, the minimum wage assists very few families in poverty
today.
An analysis of data from the 2012 Current Population Survey (CPS) March
Annual Social and Economic (ASEC) Supplement, which reports information from
2011, reveals that very few people earn the minimum wage. In 2011, 58.9 percent
of all wage and salary workers were paid hourly rates. Of those, only 3.2
percent earned at or below the minimum wage of $7.25 per hour. When looking at
all wage and salary workers, minimum wage workers accounted for a mere 1.9
percent.
Looking specifically at how minimum wage relates to poverty, only 0.3
percent of people in families with incomes below the relevant 2011 federal
poverty lines worked an hourly job and made at or below the minimum wage. The
minimum wage does not help people in poverty who actually work. When examining
the working poor, only 7.8 percent of all hourly-paid workers in poverty earn at
or below the minimum wage (6.3 percent of all wage and salary workers in
poverty).
In 2011, only 1.2 percent of people in families with incomes below the
federal poverty threshold earned an hourly wage at or below $9 per hour and only
1.5 percent earned a wage at or below $10.10 per hour. Even among all those who
work and are in poverty, only 28.5 percent earn at or below $9 per hour and 36.2
percent earn at or below $10.10 per hour. These figures suggest that increases
in minimum wage to $9 and $10.10 not only would fail to assist almost 99 percent
of all people in poverty, but they would also neglect the vast majority of
people in poverty who are actually working.
Since so few working people in poverty actually earn at or near the federal
minimum wage, very few would benefit from a minimum wage increase. Sabia and
Burkhauser (2010) found no statistical evidence that the minimum wage increases
between 2003 and 2007 affected state poverty rates. Only 15.5 percent of the net
benefits from the federal minimum wage increase to $7.25 went to workers living
in poverty. If the minimum wage were to increase to $9.50 per hour, only 10.5
percent of the net benefits would go to workers in poverty.[9]
Minimum Wage and Income Inequality
A second commonly cited goal of increasing the minimum wage is to combat
national income inequality. However, a look at the data reveals that a
disproportionate number of people who earn minimum wage are teenagers in
families that have incomes well above the national average.
According to CPS data, in 2011 36.6 percent of people who worked an hourly
job and earned at or below the federal minimum wage were teenagers living with
their parents. Those families with teenagers earning minimum wage had average
incomes of $103,964.30, well above the 2011 national average of $75,203.78. So
instead of combating income inequality, an increase in the minimum wage may
actually enlarge the income gap by limiting earnings from those who need them
most (the jobless) and directing them to those who need it least, the top 20% of
earners.
Table 1: Minimum Wage Earners[10] |
Family Member |
Percent of Minimum Wage Earners |
Average Family Income |
Teenager |
36.6 |
103,964.30 |
Head of Household |
21.3 |
48,660.49 |
Spouse |
10.3 |
64,815.38 |
Single |
13.7 |
22,998.29 |
Other |
18.4 |
40,000.03 |
National Average |
n/a |
75,203.78 |
Examining the other family categories for minimum wage earners reveals that
much smaller proportions of minimum wage earners are those actually responsible
for supporting a family. In 2011, 21.3 percent of minimum wage earners were the
head of the household; 10.3 percent were a spouse; 13.7 percent were single; and
18.4 percent were other relatives, including grandchildren, parents, siblings,
and foster children. Table 1 does reveal the average family incomes of these
groups were smaller than the national average. However, table 2 demonstrates
that those incomes were all well above the 2011 HHS federal poverty thresholds
for families of up to six people. Even single people earning minimum wage had
average incomes well above the federal poverty thresholds for families with one
person.
Table 2: 2011 HHS Poverty Guidelines[11] |
Persons in Family |
48 Continental States and D.C. |
Alaska |
Hawaii |
1 |
10,890 |
13,600 |
12,540 |
2 |
14,710 |
18,380 |
16,930 |
3 |
18,530 |
23,160 |
21,320 |
4 |
22,350 |
27,940 |
25,710 |
5 |
26,170 |
32,720 |
30,100 |
6 |
29,990 |
37,500 |
34,490 |
7 |
33,810 |
42,280 |
38,880 |
8 |
37,630 |
47,060 |
43,270 |
Given that minimum wage disproportionately goes to families with already
high incomes, it should not be surprising that 78.7 percent of minimum wage
earners in 2011 were not in poverty.
Minimum Wage and Labor Markets
Why does minimum wage fail to help those in poverty? It fails to address
joblessness.
According to CPS data, in 2011 only 6.6 percent of people with a job were in
families with incomes below federal poverty levels. Meanwhile, 27.5 percent of
those who were unemployed were also in poverty. This means that if a person is
unemployed and currently looking for work, he or she is over four times more
likely to be in poverty than those who are employed. It is important to note,
that this also does not account for unemployed people who stopped looking for
work and dropped out of the labor force entirely.
Table 3: Employment, Poverty, and Income[12] |
Employment Status |
Percent in Poverty |
Average Family Income ($) |
Employed |
6.6 |
88,233.41 |
Unemployed |
27.5 |
50,809.28 |
United States |
15.5 |
75,203.78 |
Table 3 reveals that the family income benefits are substantial for those
who are employed. While average family income of an employed person is well
above the national average of $75,203.78 at $88,233.41, average income of an
unemployed person is significantly below the national average at $50,809.28.
To make matters worse, there is mounting evidence in academia that the
minimum wage ultimately decreases employment. Neumark and Wascher (2006) perform
an extensive literature review of over 100 academic papers published since 1990.
Although the papers they reviewed have a wide range of estimates, the authors
find that almost two-thirds conclude that minimum wage has a negative effect on
employment.[13]
While there is ongoing debate regarding the effect of minimum wage on the
level of employment, new research by Meer and West (2013) suggests that
a negative impact of the minimum wage can be isolated by focusing on employment
dynamics. Specifically, they find that a 10 percent increase in
the real minimum wage is associated with a 0.53 percentage point decrease in the
net job growth rate.[14] In an
earlier analysis, AAF
applied Meer and Westfs work to current proposals to raise the minimum wage to
$9 per hour and $10 per hour, finding that these policies would cost 1.4 million
and 2.3 million jobs nationwide respectively.[15],
[16]
Conclusion
From its inception in 1938, the minimum wage was never intended as an
antipoverty tool. Today, the minimum wage assists very few people in need and
increasing it would simply increase the cliff facing the poor and unemployed.
Evidence indicates that increasing the minimum wage actually increases poverty
and income inequality by taking wages from the jobless, who need income the
most, and handing them to high-income families who need help the least.
Instead of increasing the minimum wage, lawmakers should focus on further
improving policy tools, such as the earned income tax credit (EITC). In 2011,
while 16.1 percent of all people in poverty received the EITC, only 0.3 percent
earned less than the minimum wage. Even more drastic, 56.1 percent of all
employed persons in poverty received the EITC, compared to the 6.3 percent
earning minimum wage.[17]
[2] Charles Brown, gMinimum
Wages, Employment, and the Distribution of Income,h Handbook of Labor
Economics, Volume 3, ed. Ashenfelter and Card, Elsevier Science B.V., 1999,
p. 2111, available at http://klazar.files.wordpress.com/2010/10/99_brown_mm.pdf
[5] David Neumark and William
Wascher, gMinimum Wages and Employment: A Review of Evidence from the New
Minimum Wage Research,h NBER Working Paper Series (November 2006), p.
1, available at http://www.nber.org/papers/w12663
[6] Clifford F. Thies, gThe
First Minimum Wage Laws,h Cato Journal, Vol. 10, No. 3 (Winter 1991),
p. 716, available at
http://object.cato.org/sites/cato.org/files/serials/files/cato-journal/1991/1/cj10n3-7.pdf
[7] David Neumark and William
Wascher, gMinimum Wages and Employment: A Review of Evidence from the New
Minimum Wage Research,h NBER Working Paper Series (November 2006), p.
1, available at http://www.nber.org/papers/w12663
[9] Joseph J. Sabia and Richard
V. Burkhauser, gMinimum Wages and Poverty: Will a $9.50 Federal Minimum Wage
Really Help the Working Poor?h Southern Economic Journal, Vol. 76, No.
3, 2010, pp. 592-623, available at http://www.people.vcu.edu/~lrazzolini/GR2010.pdf
[13] David Neumark and
William Wascher, gMinimum Wages and Employment: A Review of Evidence from the
New Minimum Wage Research,h NBER Working Paper Series (November 2006),
p. 121, available at http://www.nber.org/papers/w12663
Policy Analyst
Ben Gitis is a policy analyst at the American Action Forum focusing on labor
market issues.