The American Minimum Wage Would Be $24 an Hour Today If It Had Kept Pace With Productivity

A world where full-time minimum wage workers are earning $60,000 a year (at a $30 an hour wage) would be far different. A full-time minimum wage worker earns only $14,500 a year at a $7.25 an hour wage.

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President Biden has proposed raising the minimum wage to $15 an hour by 2025. This has led to the predictable cries of economic disaster from business organizations and right-wingers more generally.

The standard argument against raising the minimum wage is not supported by the evidence.

We now have considerable experience with state and local governments having substantial increases in their minimum wages. Several cities, including New York, San Francisco, and Seattle, already have a $15 an hour minimum wage. California’s statewide minimum wage is now at $14 an hour and is scheduled to hit $15 an hour for mid-size and large employers next year and all employers in 2023.

Dozens of economists have carefully analyzed these minimum wage hikes. To the surprise of many, including me, there is no evidence that these minimum wage increases have led to job loss. Instead, they have resulted in substantial improvements in living standards for millions of low-wage workers.

To be clear, this doesn’t mean that no businesses have reduced employment or possibly even gone out of business due to higher minimum wages. Small businesses are always struggling, and many close every day of the week. Any additional expense can be a burden, whether it is higher rent, the electric bill, or the minimum wage, but that is how the economy works.

We want to run the economy in a manner that ensures that workers can earn a decent living. We don’t have a responsibility to ensure that businesses can survive by paying their workers very low wages.

And again, the research indicates that when one business is cutting back employment or shutting its doors because of a minimum wage hike, another is opening or expanding employment. Economists have looked hard for evidence of job loss from these minimum wage hikes and have generally been unable to find it.

The federal minimum wage currently stands at $7.25 an hour.  It hasn’t been raised for 12 years, the longest period without a hike since the national minimum wage was first established in 1938. That translates into an annual income of $14,500 for a full-time worker. That’s not far above the poverty line for a single person and well below the poverty line of $21,720 for a family of three.

Economists often point out that If the minimum wage had simply kept pace with inflation since 1968, it would be over $12 an hour today and around $13.50 by 2025. The unemployment rate that year averaged 3.6 percent when the minimum wage was at its inflation adjusted peak value, so it did not seem to be causing unemployment then.

But this is an incredibly low bar. Setting the 1968 level as a benchmark would mean that minimum wage workers would be seeing no increase in their standard of living over a nearly 60-year period.

In the 30-year period — from when the minimum wage was established in 1938 to 1968 — the minimum wage rose in step with productivity. This meant that low-wage workers shared in the gains as the economy grew more productive and people were able to enjoy higher standards of living.

If the minimum wage had continued to rise in step with productivity growth, it would have been $24 an hour last year. By 2025 it would be close to $30 an hour, roughly twice the level that President Biden targets in his proposal. In that scenario, a full-time minimum wage worker would be earning $60,000 a year.

To be clear, raising the minimum wage to $30 an hour in 2025 would almost certainly lead to serious job loss. We have made many changes to the economy that have been designed to redistribute income upward, such as rules on patents and trade policy. Unless we reversed these policies, the economy would be unable to support a minimum wage anywhere near $30 an hour.

Nonetheless, the $30 an hour minimum wage can be a useful benchmark. It is what workers at the bottom would be earning in 2025 if we had kept the policies that we had in place over the three decades from 1938-1968.

In this context, a $15 minimum wage in 2025 can be recognized as a very modest target that will nonetheless provide enormous benefits for tens of millions of workers and their families. We really need to do it.  

Fraudulent Research on Minimum Wage Increases

A decent increase in the minimum wage would obviously decrease rates of poverty.

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President Biden’s proposal to raise the minimum wage to $15 an hour by 2025 is prompting a backlash from the usual suspects. As we hear the cries about how this will be the end of the world for small businesses and lead to massive unemployment, especially for young workers, minorities, and the less-educated, there are a few points worth keeping in mind.

While $15 an hour is a large increase from the current $7.25 an hour, this is because we’ve allowed so much time to pass since the last minimum wage hike. The 12 years since the last increase in the minimum wage is the longest period without a hike since the federal minimum wage was first established in 1938. Few workers are now earning the national minimum wage, both because of market conditions and because many states and cities now have considerably higher minimum wages.

If the minimum wage had just kept pace with prices since its peak value in 1968 it would be over $12 an hour today and around $13.50 by 2025. Keeping the minimum wage rising in step with prices is actually a very modest target. It means that low-wage workers are not sharing in the benefits of economic growth.
From 1938 to 1968 the minimum wage rose in step with productivity growth. This means that as the economy grew and the country became richer, workers at the bottom of the ladder shared in this growth. If the minimum wage had continued to keep pace with productivity growth it would have been over $24 an hour last year and would be close to $30 an hour in 2025.

There has been considerable research on the extent to which the minimum wage leads to job loss. Much recent research finds that even substantial increases in the minimum, such as the $15 an hour minimum wage that is already in place in Seattle, have no effect on employment.[1]

It is worth noting that even the research that finds the minimum wage reduces employment generally finds a relatively modest effect. A recent review article by prominent opponents of the minimum wage found that the median estimate of elasticity was -0.12 for affected workers. This estimate means, for example, that a 10 percent increase in the minimum wage would lead to a reduction in employment among affected workers (e.g. workers with less education or young workers) of 1.2 percent.

It is important to realize that even in this case we are not talking about 1.2 percent of affected workers going unemployed. Low-wage jobs turn over rapidly. For example, in a typical month before the pandemic hit, more than 6.0 percent of the workers in the hotel and restaurant industries lost or left their jobs. If we take the elasticity estimate of -0.12, it would mean that at a point in time we have 1.2 percent fewer people working in the sector as a result of a ten percent increase in the minimum wage.[2]

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A higher minimum wage also has positive societal effects. A recent review of the literature found that a 10 percent increase in the minimum wage would reduce the poverty rate by 5.3 percent. Another study found that a 50 cent increase in the minimum wage reduced the likelihood that formerly incarcerated people would return to prison within a year by 2.8 percent. The long-term effects of these and other benefits are likely to be quite large.

Finally, it is worth remembering that there is a lot of money on the side of those looking to stop minimum wage hikes. This can affect the research on the topic. While few researchers may deliberately cook their results to favor the fast-food industry, they know they can get funding for research that finds a higher minimum wage leads to job loss. There is much less money available for supporting research that finds no effect.

Probably the clearest case of such bias affecting research findings was a paper by David Neumark and William Wascher, two of the most prominent opponents of higher minimum wages. Neumark and Wascher analyzed data given to them by the Employment Policies Institute (a.k.a. “the evil EPI”), a lobbying group for the restaurant industry. They used this data to replicate a pathbreaking study by economists David Card and Alan Krueger, which found no job loss associated with a minimum wage hike in New Jersey.
Neumark and Wascher’s study found that there was in fact a significant loss of jobs in fast-food restaurants in New Jersey following the minimum wage hike. However, an analysis of the Neumark and Wascher data by John Schmitt found patterns that were not plausible. It was subsequently revealed that an owner of a number of fast-food restaurants in New Jersey and Pennsylvania (the control state) had submitted fake payroll data to the Employment Policy Institute to be used in the study. (There is no reason to believe that Neumark and Wascher realized they were working with fraudulent data.) If the faked data was removed from the analysis, the finding of minimum-wage induced job loss disappeared.

This story should be seen as a warning. Most researchers are honest and will accurately report what they find in their analysis. However, we should realize that there are some pretty big thumbs on the scale in the minimum wage battle, and those thumbs want to show that minimum wage hikes will cause job loss.

[1] A paper by John Schmitt explains why it could be the case that, contrary to the textbook story, a higher minimum wage may have no effect on employment.
[2] The actual story is a bit more complicated since typically these studies look at a specific type of worker, such as young people or workers with less education. It could be the case that employment in an industry has not changed, but we have seen older or more educated workers replacing younger and less-educated workers.

Minimum Wage Increases to Benefit 4.5 Million U.S. Workers

The minimum wage would be about $20 in the United States today if it had kept pace with productivity growth since the 1970s. Marginally higher minimum wages than the $7.25 federal level are therefore inadequate, but they do represent some gains.

At the beginning of 2018, 18 states will increase their minimum wage, providing over $5 billion in additional wages to 4.5 million workers across the country. In a majority of these states, minimum wage increases (ranging from $0.35 in Michigan to $1.00 in Maine) are the result of legislation or ballot measures approved by voters in recent years. Eight of these states (Alaska, Florida, Minnesota, Missouri, Montana, New Jersey, Ohio, and South Dakota) will have smaller automatic increases that adjust the minimum wage to keep pace with price growth. This automatic inflation adjustment preserves the buying power of the minimum wage, which has steadily eroded over time.

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Increasing the minimum wage is a crucial tool to help stop growing wage inequality, particularly for women and people of color who disproportionately hold minimum wage jobs. As low-wage workers face a growing number of attacks on their ability get a fair return on their work, Congress should act to set a higher wage floor for working people.