In President Obama’s 2014 State of the Union address, he called for an increase in the national minimum wage from its current level of $7.25 to $10.10. The $2.85 increase would occur over the next three years at $0.95 steps, in addition to indexing the minimum wage to inflation. Currently, the minimum wage is only set at a nominal level and must be increased by Congress in order to increase. The general reasoning behind increasing the minimum wage is to help low-skilled parents of children earn a wage that can support their family.
The federal minimum wage was last increased from $5.85 on July 24, 2007. The minimum wage increased to $6.55 after one year, and finally rose to its current level $7.25 after two years. The increase in the minimum wage represented a 24% increase in the hourly wage for the lowest skilled laborers. Typically, economists assume that a full-time employee works about 2000 hours per year (40 hours a week, for 50 weeks). At full time, the minimum wage annual salary rose from $11,700 per year to $14,500 in just over two years. An increase in the minimum wage to $10.10 per hour would increase the annual salary by another 39% to approximately $20,200 per year. Assuming this increase were fully phased in by 2016, the minimum wage would have been increasing at approximately 3.8% per year in nominal terms. Linking the minimum wage to inflation would likely lead to additional increases of 2-3% per year assuming inflation remains at historic levels.
Notably, a wage of $20,200 per year just exceeds the current poverty level for a family of three. Often, this prototypical family of a single working adult with two children is touted as the main target of a minimum wage increase. But there are varying impacts of the minimum wage in different states, regions, and localities. People tend to support minimum wage increases, because they sound like the right thing to do, but are they good policy? Economists tend to believe that the minimum wage is an inefficient tool at alleviating poverty, while the Earned Income Tax Credit is seen as a much more efficient tool. The goal of increasing the minimum wage is often said to be a poverty fighting tool, but the Congressional Budget Office recently reported that they estimated nearly 500,000 people would lose their jobs as a result of the increase. The Economic Policy Institute (video) supports the increase in the minimum wage for the reasons that they believe raising the floor would reduce poverty and bring it back to historic levels. The Economist discussed the President’s proposal from last year for a smaller wage increase, including the fact that many economists don’t believe raising the minimum wage would have much impact on unemployment.
Beginning in 1994, some cities and municipalities began enacting ordinances dubbed “living wages” that go above and beyond the national and state minimum wages. The living wage is estimated as the amount that it would take a family to meet a minimum “standard of living”. For example, in Harrisonburg City, the living wage is estimated to be about $8.52 per hour for a single adult, but $23.48 for a single adult with two children. In a more high-cost city like Arlington, VA, the comparable wages would be $13.22 and $29.40 per hour. For a single adult with two children, this would be more than $60,000 per year. Debating the basket of goods that falls into a “minimum standard of living” aside, few are suggesting that we set the minimum wage at $60,000 per year.
Furthermore, 21 states have increased the minimum wage above the federal rate. The fact that millions of people are earning wages that would be affected by a new higher federal minimum wage might not be the most efficient way to alleviate poverty, but should programs like the EITC continue to be increased? Would there be an improvement to overall well being given some other proposed assistance programs? Or is there some other path to reducing relative poverty in the U.S.? Employers might have a responsibility to pay higher wages, or it might just be good for business. For example, the Gap recently announced that they would be raising the minimum wage that they pay their own employees. So would it be better to wait to let employers raise their own wages? Or should the government take action?
Questions you might want to answer:
I would like you to think about the government’s role in the economy when it comes to the minimum wage. DO NOT try to answer all of these questions, just focus on one topic. Also, try to think about your comment from different angles. To write a brief comment, read the previous comments, compose your thought in a Word document, and paste it in the comment box below. The more original and factually supported your comment, the better your grade will be. Avoid anecdotal evidence including personal accounts. These emotional stories are often used in place of the general truth. Finally, your comment will appear ONLY AFTER IT IS APPROVED. Please don’t email me asking where it is, it often takes a while for me to get to it.
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I would like you to discuss some pros and cons of a minimum wage and/or living wage law in the context of one of the following questions, or one you made up on your own.
- Can you find any examples of an employer paying the statutory minimum wage locally or in your hometown? What types of skills are they seeking?
- What type of jobs are typically associated with minimum wage or near minimum wage pay, and why?
- What incentives are created for employees already working at the minimum wage by raising the statutory wage as outlined above?
- Who typically earns the minimum wage? Is it the family of three with a single working parent and two children?
- Would increasing the minimum wage help a single working parent with two children to raise their family?
- What might employers do if they were faced with minimum wage increases? Do you have any non-anecdotal evidence to support your claim?
- Do employers have any responsibility to pay wages that their employees can live on?