With President Barack Obama calling in his Feb. 12 State of the Union address to raise the minimum wage, a debate over traditional economic theory has, if only briefly, been brought to the forefront of political discussion. While basic economics would suggest that raising the minimum wage, however slight, would have a negative impact on employment, certain recent findings argue otherwise. These, coupled with statistics revealing the depressing state of worker wages from the past 20 years, paint a clear enough picture that a minimum wage raise is long overdue. “A family with two kids that earns the minimum wage still lives below the poverty line,” Obama said. He cited that “a full-time worker making the minimum wage earns $14,500 a year” and acknowledged the unfortunate reality that the economy no longer “reward[s] an honest day’s work with honest wages.”
The current federal minimum wage is $7.25 per hour. Obama’s proposal would raise it to $9 per hour initially, then tie it to inflation so wages would rise as prices rise. That doesn’t seem too drastic, except for the fact that this raise would put the federal minimum wage higher than every current state minimum, excluding Washington.
The reality is that the minimum wage has severely lagged behind other aspects of economic growth. Since the early 2000s, corporate profits have increased significantly while labor’s share of profits saw a decrease. Productivity too has seen a dramatic increase, while the real value of the minimum wage has remained relatively stagnant. A study by the Center for Economic and Policy Research found that had the minimum wage grown with average economic productivity, it would have been $21.72 per hour in 2012, nearly three times what it is now.
According to that same study, “the value of the minimum wage peaked in 1968.” The $7.25 minimum wage is below nearly every calculated benchmark – it has remained sluggish while other economic activity has surged ahead. Adjusted for inflation, the minimum wage is lower now than it was in the 1980s.
The question is – why? Opponents to raising the minimum wage would fall back on the basic economic theory that raising wages leads to a decrease in employment. While that may hold true in theory, in practice things aren’t as clear-cut.
One study from the Institute for Research on Labor and Employment at the University of California, Berkeley found “strong earnings effects and no employment effects of raising the minimum wage.” It found that raising the minimum wage potentially reduces employee turnover, ultimately saving businesses in the long run.
Another study from the Center for Economic and Policy Research echoed that finding. In addition to lower labor turnover, the study also found that adjustments including “improvements in organizational efficiency; reductions in wages of higher earners … and small price increases” combat raises in the minimum wage.
Ultimately, the study found that “these mechanisms appear to be more than sufficient to avoid employment losses, even for employers with a large share of low-wage workers.” Employers may take the appropriate steps to ensure stable employment after a raise in the minimum wage, allowing workers to earn the wage they deserve: an economically and historically fair one.
The president seeks an economy that ensures “no one who works full-time should have to live in poverty.” Raising the minimum wage to $9 per hour, and then tying it to inflation, won’t fix the large discrepancies between labor and corporate profits, but it’s about time the issue is addressed.