A Basic Fact about the Minimum Wage

Please, for accuracy’s sake, figure inflation into discussions of the history of the minimum wage.

February 1, 2014

Comments

Let me start by saying I have no strong opinion* on minimum wage policy insofar as I do not really have the evidence or the expertise to say what the appropriate level ought to be. I am not trying to make even a subtle argument about policy with this post. I do think, however (and this is my motivation) that to have a conversation about this policy that the following information is essential.

One thing that I have long found annoying, especially in casual conversation (or even supposedly serious political commentary) on this subject is when people resort to the “when I was I a teenager, the minimum wage was $X, but now it is almost $2X, so why the griping?” First, this is annoying because it is usually uttered in the context of a summer or part-time job and therefore contains a heaping help of lack of self-awareness. The minimum wage is not designed to help teenagers get spending money, which is the way a lot of successful people discuss it. Second, and more significantly, such statements ignore a very basic force of the economy: inflation. Yes, gramps, everything was cheaper in dollars when you were a kid, but did it really cost less?

To wit, Pew Research (5 facts about the minimum wage) notes the following:

Adjusted for inflation, the federal minimum wage peaked in 1968 at $8.56 (in 2012 dollars). Since it was last raised in 2009, to the current $7.25/hour, the federal minimum has lost about 5.8% of its purchasing power to inflation.

That does, I am pretty sure, run counter to popular perception.

Here’s a nifty graph:

None of this gives any guidance to what the appropriate level ought to be, but it does, at least, provide a better way to think about the numbers.

*Granted, I have opinions (about almost everything). I also have some general impressions. I don’t, however, really have all that much to back these opinions, so will keep them to myself, at least for the purposes of this post.

47 responses to “A Basic Fact about the Minimum Wage”

Pinky

February 1, 2014 at 12:32 pm

Maybe people would guess the rate of inflation incorrectly (some too high, some too low), but I think that everyone is aware of it and factors it into any discussion, consciously or not.
James in Silverdale, WA

February 1, 2014 at 12:38 pm

No one can survive on minimum wage, certainly not with a family, and certainly not while attending school. The inevitable outcome is welfare. It needs to be at least $20 per hour. No one who is currently rich would be any less so as a result.
humanoid.panda

February 1, 2014 at 12:44 pm

What makes the whole discussion about the minimal wage especially grotesque is that the same people who think that the inflation is running rampant and is hidden by the fed somehow are the loudest voices against a raise in the minimum wage. In other words, they think the minimum wage far lost far more than just 5.8% from its value AND that is as it should be!
john personna

February 1, 2014 at 12:48 pm

@James in Silverdale, WA:

If we want to provide a safety net for food, clothing, and shelter we can broadly do it two ways: by enforcing a minimum wage, or by government supplement.

We seem to have chosen a hybrid approach, with a low minimum and things like earned income tax credit, food stamps, housing supplements.

The argument for a low minimum plus supplement is that you at least get people out of the house, and you don’t create a high barrier where no one is hired unless they can contribute more than $20/ hr.

I don’t have a strong opinion either, but I do lean toward the hybrid, with part of the solution in a minimum and part in a supplement.
JKB

February 1, 2014 at 12:58 pm

This doesn’t tell the whole comparative story. We’d need the minimum wage in purchasing power parity to see that. This post by M.J. Perry illustrates the changes, although not using minimum wage. We’d also need to add in quality improvements in products, housing and food.

A second source that seems to keep being overlooked is the improvement in the tax induced poverty since the 1960. Tax policy used to push a lot of low earners into poverty but changes in the 1960s altered that with such things as the Earned Income Tax credit etc.

Not to mention the alterations in the labor cost divisions between benefits, direct to government payments and wages.

All this means is that there are a lot more facets to include to get a decent comparison.

One thing that does seem apparent though is that the arbitrary increase in the wage portion of labor cost (and sometime proportionally the other constituents) more individuals who labor quality does not justify those costs are left out of employment where they could establish a job history and improve their skills to a level commiserate with a higher wage.
michael reynolds

February 1, 2014 at 1:00 pm

If the US government in effect subsidizes business by indirectly paying their low-end workers, doesn’t that mean business has less incentive to automate? Is that necessarily a good thing?

When I was in Australia I was interested to see that pharmacies are automated. You’ve got one guy and a machine. Everything is pre-measured and blister-packed. The guy is just there to check that you have a valid prescription.

In Italy, by contrast, you can’t get two dozen OTC ibuprofen without waiting in line and employing half a dozen voluble folk to carefully hand you your twelve-pack of ibuprofen.

Now, obviously we could have our prescription data encoded on a card and the pharmacy could be completely human-free. CVS could cut the floor space of their pharmacies by 70%, saving utilities, construction costs, increasing parking space, etc…

Which is the better model over the long haul? Subsidize cheap work and thus inefficient business? Or stop subsidizing and incentivize productivity?
Pinky

February 1, 2014 at 1:08 pm

@James in Silverdale, WA: What’s wrong with welfare, from your perspective? I mean, if someone’s doing $5 worth of work an hour, and he needs more to live on, then why not have the government give it to him, rather than have the government force the employer to pretend that he’s worth $10 per hour?
humanoid.panda

February 1, 2014 at 1:28 pm

@michael reynolds: This makes sense, but what you do with the people who are out of work, more or less permanently. You could make a case that a universal basic income system would resolve the issue, but since we don’t live in a Star Trek universe where human nature had changed, I think that tens of millions of permanently non-employed people might create all sorts of ugly social maladies. Wouldn’t a slightly less unproductive economy (I don’t think Italy is that much poorer than Austria) is a price worth paying for avoiding such problems?
Dave Schuler

February 1, 2014 at 1:34 pm

Yeah, I posted on this subject not too long ago as well. How high the minimum wage was in real terms depends a bit on how you calculate inflation but 1968 is the right year to mark as its peak.

If anyone can produce evidence that a 40% increase in the minimum wage would be without adverse effects on employment or, perhaps more importantly, on job creation, I’d certainly like to see it. To the best of my knowledge what evidence there is suggests that a modest increase could have negligible effects but the consensus among economists is that the demand for labor is, in fact, not inelastic with respect to price.

Another effect that is rarely mentioned is the prospect that increasing the minimum wage, particularly increasing as sharply as 40%, would create a black market in labor.

All of that is why I’m more favorably disposed to the Senate Democrats’ plan for a gradual increase in the minimum wage, allowing for possible course corrections, rather than raising it all at once to a level that’s higher than it has ever been before in real terms.
humanoid.panda

February 1, 2014 at 1:38 pm

@Pinky: Because there very little evidence that countries with comparable level of economic development and higher minimum wages have less total employment than the United States. In other words, implies that the productivity of labor in highly developed economies is higher than the value assigned to labor by US employers. The reasons for this are that
1. The level of welfare spending in the US is high enough to dull political pressure for higher minimum wages, but not high enough to make people drop out of the labor force, and thus does not decrease labor supply.
2. The barriers for unionization in the American private sector are uniquely tall.
3. Illegal immigration is putting downward pressure on low-level wages, while enforcement is not strict enough to deter employers from hiring immigrant labor, but is intense enough to stop them from organizing into any form of collctive action.
The fact that all this creates a perfect environment for employers is surely a pure product of the free market, and absolutely unforced negotiations between employers and employees.
Rafer Janders

February 1, 2014 at 1:42 pm

@Pinky:

What’s wrong with welfare, from your perspective? I mean, if someone’s doing $5 worth of work an hour, and he needs more to live on, then why not have the government give it to him, rather than have the government force the employer to pretend that he’s worth $10 per hour?

Well, for one thing, that’s more inefficient and adds an extra layer of bureaucracy, paperwork, and labor. It’s easier to have A pay B $10, than to have A pay B $5 and then have C pay B another $5.
John425

February 1, 2014 at 1:51 pm

Everybody seems to focus on the human element of a wage. I certainly feel for low wage earners but the other part of earned income is also important.

Is the job itself actually worth $10 an hour?

Is wrapping a pre-cooked Egg McMuffin REALLY worth $10 an hour? Does mopping floors call for $12 or more? At the risk of offending many, my local Denny’s hires Down’s Syndrome workers for the more menial jobs Dunno if they are under a special program or not, but clearly, they demonstrate that some jobs are less than “real jobs” and could be considered “make work”.
FWIW, I applaud Denny’s for this program.
Andre Kenji

February 1, 2014 at 1:59 pm

@Pinky: The main problem is that doing what the Germans do, where the government subsidizes some manufacturing workers, at least makes sense. Subsidizing people flipping burgers does not.
Andre Kenji

February 1, 2014 at 2:11 pm

@humanoid.panda:

Wouldn’t a slightly less unproductive economy (I don’t think Italy is that much poorer than Austria

)

Austria is not so different from Italy from that standpoint. Both are industrial economies with industrial policies and strong job protections. The difference is that Italy has stronger job protections, larger bureaucracy and has stagnated economically since 15 years ago.
Steven L. Taylor

February 1, 2014 at 2:12 pm

@Pinky:

Maybe people would guess the rate of inflation incorrectly (some too high, some too low), but I think that everyone is aware of it and factors it into any discussion, consciously or not.

This is not my experience, but I cannot definitively prove my position. I would say two things.

1. If people understood inflation they would not talk about what stuff used to cost when they were a kid in a way that indicated that things used to be cheaper.

and

2. If we polled the population as to when the minimum wage was at its peak, what percentage do you think would pick 1968 (or even close to 1968)? My guess, and I will readily allow it is a guess, is that the number would be quite low.
Rafer Janders

February 1, 2014 at 2:13 pm

@Pinky:

What’s wrong with welfare, from your perspective? I mean, if someone’s doing $5 worth of work an hour, and he needs more to live on, then why not have the government give it to him, rather than have the government force the employer to pretend that he’s worth $10 per hour?

Or you could have the government just give him $10 an hour, and free his time up to do something more useful and efficient than, say, flip burgers, and leave the employer to find employees willing to work for $10 an hour, rather than have the government give the business a $5 gift by subsiding its workers.
humanoid.panda

February 1, 2014 at 2:31 pm

@Andre Kenji: That is my point exactly @John425: What is the “value” of anything, but what someone is willing to pay for. Was the value of flipping burgers any higher in 1968 then now (perhaps, but given rising productivity in the economy as a a whole at a time of stagnating wages, clearly the value of an employee to employer had increased quite sharply) ? Is it higher in Australia than in the United States (I don’t see how can that be true? Given those realities, maybe we should look for answers not in economics 101 but in what separates United States (1968) and Australia (2014) from the USA (2014): a drastic imbalanca of power between capital and labor.
michael reynolds

February 1, 2014 at 2:48 pm

@humanoid.panda:

Well, that’s the question toward which we are hurtling as technology advances. Do we envision a future in which large swaths of the population have no gainful employment? Or do we prefer a future where large swaths of the population are in jobs that are kept viable through artificial means and that pay them less than a living wage?

Damned if I know. I got the question, I don’t have the answer.
Pinky

February 1, 2014 at 3:13 pm

@Rafer Janders:

It’s easier to have A pay B $10, than to have A pay B $5 and then have C pay B another $5.

Not if your name is A.
Pinky

February 1, 2014 at 4:09 pm

@Rafer Janders:

Or you could have the government just give him $10 an hour, and free his time up to do something more useful and efficient than, say, flip burgers, and leave the employer to find employees willing to work for $10 an hour, rather than have the government give the business a $5 gift by subsiding its workers.

Huh?

Why would the company have to look for another worker rather than the one they have? And the problem isn’t finding the worker willing to do the job; the problem is that the worker isn’t getting enough pay to keep afloat. And you can’t really call it a subsidy to the business, which is currently in an arrangement that it would continue in without assistance. A subsidy is the last thing it is.
Grumpy Realist

February 1, 2014 at 4:19 pm

You can also think of wage subsidies as protection against social unrest and revolution. Which is what will happen in the end if we keep automating and dismiss the unemployed workers as “simply not trying hard enough to find new jobs”
Mikey

February 1, 2014 at 4:39 pm

@michael reynolds: I’m starting to think we’ll have to implement a national basic income or negative income tax at some point. It just might be that a redistributive solution is the only effective option.

My semi-educated (macro and micro in college and macro in grad school) opinion is a high minimum wage would be far more distorting to labor markets than a redistributive solution.
Dave Schuler

February 1, 2014 at 5:31 pm

@Mikey:

I’m starting to think we’ll have to implement a national basic income or negative income tax at some point.

We already have one. It’s called the Earned Income Tax Credit. The president suggested loosening the requirements in his SOTU and, given the change in our society over the last several decades, that’s probably a good idea.
Ben Wolf

February 1, 2014 at 6:20 pm

@John425:

Is wrapping a pre-cooked Egg McMuffin REALLY worth $10 an hour? Does mopping floors call for $12 or more?

Absurd. There is no evidence of any kind that one job is of more natural value than another. There is no law of the universe which requires that mopping a floor shouldn’t pay much. The reason a lawyer can make so much and a custodian cannot is because lawyers receive an immense government subsidy stemming from a vast, highly complex legal code. Doctors earn six figures because government pours hundreds of billions per year into health services. The same goes for engineers, for tech and for scientists.

Wages are not determined by market competition but administratively. Pour a trillion dollars a year into clean floors and custodians will be upper-middle class overnight.
Jc

February 1, 2014 at 6:41 pm

@Ben Wolf:

I was going to say “is running a bank into the ground worthy of a $10MM salary and even more generous severance?” You do your minimum wage service job well, and customers come back. A reward to the owner and pride in your work. You run a financial institution into the ground with poor leadership and you still get a fat parachute while people lose their jobs and customers and creditors lose their money. We want kid’s to go to college, yet offer no truly decent wage to help pay off the debt to do so.
Scott

February 1, 2014 at 6:43 pm

@JKB: This is true but this is a selective list from which to draw conclusions. My personal anecdote is this. In 1972, I had to work 6-7 hours at minimum wage to earn my freshman college chemistry book (Linus Pauling, 3rd edition, I still have it). My daughter has to work 20 hours to earn her freshman chemistry book. I doubt the quality has increased.
Jc

February 1, 2014 at 6:55 pm

Try explaining the importance to a millennial of the value they got from their parents paying for their college education and they just shrug their shoulders. They don’t get it. Does anyone have a figure for the total hourly workforce that earns between 7.25 – 10.10 an hour? I believe those that make minimum wage only equates to around 2-3% of all employed. Trying to understand what size of the labor market would be affected by a hike. Also love that small businesses are brought up by GOP to curtail a hike, yet these are the first people to praise having a Wal-Mart come to a small town as a positive, which we know ain’t always the case
Rafer Janders

February 1, 2014 at 7:40 pm

@Pinky:

Um, I don’t think you understand what efficiency means….

Remember, your name isn’t A — it’s the USA. On a society-wide level, it’s easier to have the US government set one minimum wage, and enforce it across the board, rather than to create a separate welfare bureaucracy that will subsidize private businesses by topping up the pay of their workers.
Pinky

February 1, 2014 at 8:18 pm

@Rafer Janders: Someone’s name is A. That’s the basic fact about wages that is being lost on this thread: they’re paid in exchange for work. They’re not a favor to the worker, and despite what Ben says they’re not arbitrary. (Is that really how many r’s there are in “arbitrary”? That looks wrong.) Welfare isn’t a subsidy to the company which doesn’t pay its workers enough to escape poverty.

Wages are a market decision. An imperfect market, but a market. There are more people who have the ability to mop the floor than have the ability to make a failing bank only lose $300 million per year. If you assign an artificial floor to wages, there are some jobs that won’t get filled. If you put an artificial cap on wages, there are some workers who won’t work.
Gustopher

February 1, 2014 at 8:45 pm

@michael reynolds: we live in a society where we are deferring a huge amount of maintenance on our infrastructure, because we just don’t want to pay for it.

For the short term, there is enough work to be done that give or take everyone could be employed, if we bothered to get it done. Medium term — I don’t know, but I really doubt any of us can make accurate predictions more than 10-15 years down the line.

One good bird flu could cut the workforce down to the point where we don’t have enough workers (or consumers — not sure which would be a bigger problem).
Ben Wolf

February 1, 2014 at 10:04 pm

@Jc: That’s an excellent point. Criminal organizations like JPMorgan Chase and HSBC actively destroy production and yet reap enormous incomes for it. One good person with a mop contributes more to society than these crooks who have admitted rigging every price on the planet and laundering money for druglords and terrorist organizations. The way in which we assign financial rewards is perverse.
Anonne

February 1, 2014 at 11:39 pm

This country was founded on the theft of labor, and we have not progressed that far beyond it. People denigrate flipping burgers and mopping floors, and people who pick agricultural products but it’s not easy work – it is physically demanding. If the people looking down their noses at them had to do it for a living, they would find that the crappy pay that doesn’t even cover your health expenses would need to be higher, too. Maybe not $15, but definitely higher than what it is now.
bill

February 1, 2014 at 11:56 pm

@Anonne: yet they have the opportunity to become whatever they want………….so mop floors if that’s all good with you, nothing to be ashamed about. mw jobs are starting points, everyone can’t be an astronaut….get a clue.
the federal gov’t. should have nothing to say about it, markets adapt whether they like it or not.
bear in mind that we’re “used to” high food prices now, and $3/gas.
you got what you voted for and still aren’t happy?
Anonne

February 2, 2014 at 12:12 am

The point is that people devalue the work, and it is reflected in the pay. They do not appreciate the value of the labor, despite the amount of capital that it reaps.

The federal government shouldn’t be subsidizing businesses for refusing to pay a living wage.
anjin-san

February 2, 2014 at 2:01 am

@ bill

everyone can’t be an astronaut

I have a friend who is an astronaut, we go back a long time. I think I can say with near certainty that, if she read some of your comments, she would think you are an idiot.
Stonetools

February 2, 2014 at 4:07 am

@Pinky:

We actually have a good example of who A is . 25 per cent of Walmart’s workers are receiving food stamps or some type of government assistance. In the meantime, the Walton family is maybe the richest in America. Ain’t free enterprise wonderful?
Andre Kenji

February 2, 2014 at 7:21 am

I think that´s part of larger discussion: one of the reasons that the United States has relatively low unemployment is precisely because workers enjoys very few protections. You have relatively low unemployment, specially when compared to Europe, but there are too many people underemployed.

I don´t think that´s a good deal. Regarding jobs, the problem is that the era when people could have good living with jobs that required no or few qualifications are ending. Training and educating the workforce is very important.
Stonetools

February 2, 2014 at 8:32 am

@Andre Kenji:

Looking at Wikipedia’s list of current unemployment rates by country, I see Germany’s unemployment rate at 5.2 per cent and Austria’s even lower. Australia has high minimum wage of something like $20 per hour and it’s unemployment rate is 5.5 per cent.
If you look at US unemployment rates by state, it is far from clear that states with higher minimum wages and more worker protections have higher unemployment rates than other states.
Tyrell

February 2, 2014 at 8:44 am

@humanoid.panda: I go by what I experience and what I hear from other people too, not these government reports that are translated by news channels.Wages for most people have been flat for several years. Prices for many things have gone up. Food prices are a problem. I have receipts from about four years ago and see many items have almost doubled. Yet my pay is the same. $50 could get two bags of groceries, now that will get you one bag, maybe. Also, property taxes go up yearly (while local services are cut and the schools lay off teachers (but not high paid administrators). A city will raise tax rates and fees on everything while spending money on sports stadiums that most people can’t afford to get in. Most restaurant prices have gone up and now they expect a higher tip. Yet my pay has been flat. People are working two jobs (if they are lucky enough to find them) to just pay for food. Utilities and insurance go up yearly. Our local town raises property taxes to give the mayor and police force – his three relatives) a raise. Insurance goes up yearly and this is what our agent says: more and more wrecks involving uninsured motorists. I know a lot of people who lost good paying jobs in 2008 and are lucky getting jobs selling ice cream or painting fire hydrants. Last year there was some major economist who wrote that the US economy is changing and will never again be what we experienced for most of our lives. Less and less people will be working .
Food: 2 liter soft drink- $2, four years ago was $1, bag of nachos $3.88, was $1.98 ( for a larger bag), candy bars $1.75, was $1, can soft drink $1.50, was 50¢ !! Movie theater food? Please don’t even think about it.
This has been my economic report. Things aren’t getting any better.
“Take this job and shove it ..I don’t work here anymore” (J. Paycheck)
Andre Kenji

February 2, 2014 at 8:54 am

@Stonetools:

Looking at Wikipedia’s list of current unemployment rates by country, I see Germany’s unemployment rate at 5.2 per cent and Austria’s even lower.

But Germany does not have a minimum wage. The greatest asset for Germany is that they have a very qualified workforce due to their apprenticeships programs, they also have strong programs to support jobs in manufacturing. And their unemployment rate is 6,8%.

http://www.fxstreet.com/news/forex-news/article.aspx?storyid=5c13df0a-404b-475e-a418-007ade5ca909

My point is that substituting unemployment with underemployment is a lousy deal.
Andre Kenji

February 2, 2014 at 9:02 am

@Stonetools:

If you look at US unemployment rates by state, it is far from clear that states with higher minimum wages and more worker protections have higher unemployment rates than other states.

No, that´s because the states with lowest unemployment are underpopulated states like South Dakota or Nebraska, where most people don´t want to live because there is nothing to do there. Hawaii is the only sun belt states in the Top 10 states with lowest unemployment rate. Besides that, considering the differences of cost of living the minimum wage in states like Maryland and California is way lower than in Nebraska.
Pinky

February 2, 2014 at 1:26 pm

@Anonne: Low pay is not the same as denigration. It’s not necessarily undervaluing the work; it’s valuing it differently than other work. The work has value: the amount of extra profit that it leads to. The other way of measuring the work’s value is the amount that it would cost to replace the worker with someone equal. Either way, it doesn’t devalue the worker to pay him less than someone else, unless the amount you’re paying him is under value.
Pinky

February 2, 2014 at 1:28 pm

And again, someone tell me how there’s a subsidy. A subsidy is where a company is paid to do something it wouldn’t do otherwise. If there were no food stamps, the amount of money a company would pay the lowest-earning worker wouldn’t change.
humanoid.panda

February 2, 2014 at 2:31 pm

@Tyrell: So, do you support raising the minimum wage to accomodate those price hikes?
dmhlt

February 2, 2014 at 4:10 pm

@John425:

Just a small nit to pick WRT something I frequently see.
As a physician I just want to point out that it’s Down Syndrome … NOT Down’S Syndrome
anjin-san

February 3, 2014 at 9:36 pm

@ Pinky

The work has value: the amount of extra profit that it leads to

Which absolutely explains why Kerry Killinger was compensated in excess of 100 million to run WAMU into the ground and destroy God only how much value…
Pharoah Narim

February 4, 2014 at 8:17 pm

@John425: Is throwing a piece of dried pigskin around a field or through a hoop worth millions of dollars? McDonald’s is a multi billion dollar company so yes…wrapping the egg muffin plays a part in that success just like the 53rd guy on an nfl roster shares in the success of the nfl even though he’s infinitely replaceable. Taxpayers don’t subsidize the salaries of the rung worker of the nfl do they? Why doesn’t McDs just hand unwrapped, unbagged food out the window since its not that important. Why do you despise people that work for a living?