In February’s State of the Union address, President Obama provoked conservatives’ ire by proposing an increase in the minimum wage from $7.25 per hour to $9. Especially in a struggling economy, wouldn’t a minimum-wage boost increase unemployment and hurt small businesses? And would it even help the working poor? Let’s unpack some of the assumptions about the minimum wage that have stuck around since its creation almost eight decades ago.
• Myth No. 1: The minimum wage covers everyone.
The Fair Labor Standards Act established a minimum wage for the United States in 1938 and criteria that determine who must receive it.
A babysitter or the kid who mows your lawn isn’t covered as long as he or she doesn’t work more than eight hours per week or get paid more than $1,700 per year by one employer. Some employers, such as small farms, aren’t required to pay minimum wage. There are minimum-wage exceptions for full-time students and the disabled. Those younger than 20 can be paid a sub-minimum wage of $4.25 for up to 90 days while these inexperienced workers learn the ropes. And workers who receive more than $30 per month in tips are required to be paid only $2.13 per hour.
But the biggest group of people left out of minimum-wage laws are those working in the rapidly growing field of home health care. Congress excluded “companionship services for the aged or infirm” when it expanded minimum wage and other protections to domestic service workers in 1974. This exclusion has been interpreted broadly to exclude the rising group of professional home health care workers. The Labor Department has been working on a new rule that would narrow the scope of companionship, but until it is enacted, these workers are not covered.
• Myth No. 2: The minimum wage stays the same if Congress doesn’t change it.
Congress sets the minimum wage in nominal dollars, so it doesn’t keep pace with inflation. Because the cost of living is always rising, the value of a new minimum wage begins to fall from the moment it is set. In fact, today’s minimum wage of $7.25 buys less than the minimum wage did through all of the 1960s, 1970s and much of the 1980s. Raising the minimum wage to $9 an hour in 2015 would give us about the same real value as the $3.35 minimum wage of 1981.
Although the minimum wage has been raised 22 times since it was established, those increases are needed to restore its inflation-eroded value back to its earlier real level. Every time Congress debates raising the minimum wage, it is simply rehashing an old debate: Do we want the same policy today that we had last time the minimum wage was raised? Instead, Congress should set an inflation-adjusted or -indexed minimum wage. It would not only be more fair to workers but efficient for government.
• Myth No. 3: Raising the minimum wage increases unemployment.
In a perfectly competitive market, anything that raises the wage above a level at which the supply of workers equals the demand for them will create unemployment. But a perfectly competitive labor market requires that neither workers nor firms have bargaining power; that everyone has all the necessary information; that workers are a commodity, rather than different people with different skills and a need to be motivated; and that there are no frictions preventing supply from matching demand.
Although everyone I know who teaches introductory economics presents this model to students, few believe that it describes the real world. In fact, in a survey of 40 leading economists through the Initiative on Global Markets, a diverse group including both prominent liberals and conservatives, only about a third agreed that raising the minimum wage would make it harder for low-skilled workers to find employment. Because only about 1 in 10 thought the costs of hiring probably would be bigger than the benefits of higher wages for low-skilled workers, even that number overstates how concerned these economists are about the potential negative effects of raising the minimum wage.
So what’s the discrepancy between theory and what so many economists think? When economists have analyzed the data, many have found few, if any, negative effects of a minimum wage on employment. This has shifted some of the thinking in the profession – and pointed to flaws in a perfectly competitive model.
Paying workers more often leads them to feel better about their work and reduces stress, both of which increase productivity. And when workers produce more, employers’ labor costs fall. Companies such as Costco have figured this out, and voluntarily pay higher wages. Other firms may not care whether they pay less and get less from their workers, or pay more and get more.
But workers aren’t indifferent to this choice. A family trying to survive on the minimum wage can find itself living deep in poverty. Raising the minimum wage would not only lift some families out of poverty, but their additional earnings would contribute to the overall economy by raising demand and job growth as they spend more in their communities.
• Myth No. 4: The minimum wage is a partisan issue.
The vast majority of the public supports raising the minimum wage from $7.25 to $9 per hour, according to a Gallup Poll. Not surprisingly, more Democrats than Republicans favored Obama’s proposal, but 71 percent favored the increase, including a majority of respondents in each party.
Perhaps most interesting is a study that randomly exposed participants to information about inequality in the United States. A majority of liberals and almost half of conservatives already supported a higher minimum wage, and those shown information about U.S. income distribution became even more supportive of raising the minimum wage.
• Myth No. 5: Raising the minimum wage wouldn’t help the working poor.
Think only teenagers earn the minimum wage? Analysis of minimum-wage workers shows that, at most, 20 percent are teenagers, about 50 percent are full-time employees and about 60 percent are women. The vast majority have household earnings below the median, which was $50,054 in 2011.
Those working full time for minimum wage earn about $15,000 per year. This income puts a parent with two children well below the poverty line of $19,530 for a family of three. It’s even worse for tipped workers, making it no surprise that more than 20 percent of restaurant and service workers live in poverty.
Not only would raising the minimum wage reduce poverty, but research has shown that erosion of the minimum wage leads to increases in inequality. We should ask why we have a minimum wage in the first place. Surely the answer is that people who work full time year-round should be able to keep their families out of poverty.