Bloomberg View

Bloomberg View: Raise the Minimum Wage


Bloomberg View: Raise the Minimum Wage

Illustration by Bloomberg View

Congress last approved an increase to the minimum wage in 2007, raising it in stages up to $7.25 an hour in 2009, or $15,080 a year. Adjusted for inflation, that amount is lower than what a minimum-wage worker earned in 1968 and is too meager to offer anyone the chance to climb out of poverty, let alone afford basic goods and services.

About 10 states are now considering raising the rate, and Senator Tom Harkin, an Iowa Democrat, is proposing to increase the federal rate in three increments to $9.80 an hour in 2014. Many of the initiatives under consideration would smartly tie the minimum wage to the cost of living, meaning that those workers’ wages would finally keep up with inflation.

A low-wage bias is creeping into the economy, as Bloomberg economist Joseph Brusuelas recently put it. In many cases, minimum-wage work is all that’s available, which may explain why such workers are older and better-educated than they were three decades ago. In 2010 nearly 44 percent of minimum-wage workers had either attended or graduated from college, up from 25.2 percent in 1979, according to the Center for Economic and Policy Research, a liberal think tank.

Raising the minimum wage won’t entirely solve the problem of anemic incomes, but it would help. Economists have long found that boosting the minimum wage can raise income levels for those earning just above the minimum. Employers, seeking to protect “wage ladders,” often bump up salaries for slightly higher-paid employees, too. This is one of many reasons that critics, including business groups like the U.S. Chamber of Commerce, the National Restaurant Association, and many Republicans, oppose minimum-wage increases. They point to studies that have found the increases hurt teenagers, because young workers typically get minimum-wage jobs, which become scarce if employers cut jobs to compensate for raising salaries.

A wave of new economic research that looks at micro-level employment patterns disproves those arguments. The studies find minimum-wage increases even provide an economic boost, albeit a small one, as strapped workers immediately spend their raises. A 2011 paper by economists at the Federal Reserve Bank of Chicago found that a $1 minimum-wage increase boosts household income by about $250 and spending by about $700 a quarter in the following year. The spending increase is driven by a small number of households that make large purchases, primarily vehicles.

A team of economists, led by Arindrajit Dube of the University of Massachusetts at Amherst, compared employment levels in contiguous areas with disparate minimum-wage levels over a 16-year period and concluded in a 2010 paper that there are “strong earnings effects and no employment effects of minimum wage increases.”

The federal minimum wage was always meant to be a floor, not a ceiling. Today, someone earning the minimum would have to work 749 hours to afford one year of health insurance premiums and 923 hours to afford a year’s tuition at a public four-year college.

Although this math may not be persuasive in Washington, it does seem to be influencing legislatures across the country. Let us hope that states lead the way on the minimum wage, and that they tie increases to the cost of living, making endless rounds of legislation unnecessary. Then let us hope that fresh research and improved lives built on hard work compel Congress to follow.

To read Michael Kinsley on Mitt Romney’s view of success and Al Hunt on key electoral swing groups, go to: Bloomberg.com/view.


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