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.
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.