Should The Minimum Wage Be Increased?

Contributed by Ron Johnsey, September 23, 2013

Around the country, fast food workers have been protesting and staging work strikes in order to call for an increase in the minimum wage to $15.00 an hour. The latest protests follow a series of strikes that began last November in New York City. The biggest effort so far was over the summer when about 2,200 of the country's millions of fast-food workers staged a one-day strike in seven cities. Some politicians and economists are calling for a more modest increase in the minimum wage of about $9.00 an hour.
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Is the minimum wage still appropriate at its current level? Should it be raised to $9.00 an hour, or even $15.00 an hour? Individual states are free to set their own minimum wage as long as it is not less than the federal rate which is currently $7.25 an hour. Exceptions do apply for some employees such as students and tipped employees. Some of the highest minimum wage rates are in Washington State ($9.19/hour), Oregon ($8.95/hour), and Illinois ($8.25/hour). California just passed a minimum wage bill raising their rate from its current amount of $8.00/hour to $10.00/hour by 2016.

The chart above shows both the nominal increase in the minimum wage and the real change in 2013 dollars. The real wage rate peaked in 1968 at $10.74 an hour and has declined steadily since. The recent increases in 2007 through 2009 helped reverse this trend but inaction in the rate since then has allowed inflation to eat into the buying power of the minimum wage rate. The chart also shows the proposed increase rates of $9.00/hour and $15.00/hour. Clearly, the rate proposed by the strikers and protesters would be a significant increase in wages.

The minimum wage was never meant to be a “living wage”, i.e. an amount that would allow the average working person to meet their needs. These needs include shelter (housing) and other incidentals such as clothing, food, utilities, and transportation. Minimum wage workers are usually considered “entry-level” employees that are just starting their working lives or have little or no previous job skills and may still be living with their parents or roommates to share costs. In a weak economy; more and more of the unemployed are taking low-wage, entry-level positions just to get by.

One factor that the minimum wage does not take into account is the geographic diversity of the cost of living. $7.25 an hour will not buy you as much in Los Angeles or New York as it will in Cleveland or Tampa. The following table shows the average wage rate for fast food counter service workers in 2012 and the average Class B apartment rental rate for several select metropolitan areas.

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The U.S. average hourly wage for fast food workers is $9.00 an hour (not necessarily entry-level). This translates to an annual income of $18,720 for a full-time worker (2,080 hours per year). Using the current average for Class B apartment rents nationwide, this average worker would devote almost two-thirds of their paycheck towards renting a modest apartment. In New York or Los Angeles, they would be priced out of the average Class B apartment unless they had supplemental income from a spouse or roommate. Even the more affordable markets require the average full-time fast food worker to devote almost half of their income towards housing costs. If they considered the average Class C apartment in their market, many more workers could afford this option. The average rent-to-income ratio for fast food workers would drop to less than 50% for the U.S. and closer to 40% in the more affordable metros in the country. Given the fact that the majority of jobs created so far this year have been in the lower paying retail and food service industries, the demand for Class B and C apartments will remain strong throughout this year and next.

What effect would an increase in the minimum wage (be it $9.00/hour or $15.00/hour) have on the economy in general and hiring specifically? Economists disagree as to whether these wage increases kill jobs or not. Employers can pass the increased wage costs on to the consumer or reduce benefits or hours of existing workers. More likely, since the increase affects so many employers all at once, competition for higher paying entry-level jobs is diminished and pay raises increase employee loyalty, reducing turnover and resulting in higher efficiency and reduced costs in the long run.

Still, there is no guaranty that raising the minimum wage will make life better for those living from paycheck to paycheck. Perhaps coincidentally, the minimum wage was increased by Congress just prior to or coincident with four of the last five national economic recessions.