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Last Updated: April 6, 2016

Federal Minimum Wage: Is The Federal Minimum Wage Good For The Economy?



Introduction

SUPPORTERS ARGUE

The minimum wage helps reduce unemployment and alleviate the effects of poverty by putting more money in the hands of workers and increasing their ability to afford basic costs of living, like housing and food. A higher minimum wage will also help reduce income inequality, which has risen sharply in the United States in recent decades.

OPPONENTS ARGUE

The minimum wage increases unemployment among low-income workers. By not allowing businesses to pay employees what their labor is truly worth, the government is distorting labor markets and ultimately making it harder for the poor to find work. The minimum wage is especially difficult on small businesses, and there is no evidence that it reduces poverty.




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Workers in New York City protest for a higher minimum wage in April 2015.

The minimum wage—the lowest hourly rate at which most employers may legally pay their workers—is intended to protect workers from labor exploitation. The minimum wage has long been a contentious and politically fraught issue. Labor interests often advocate raising it, while business interests not only fight such increases, but protest the very existence of a government-mandated minimum wage. Indeed, many conservatives view the minimum wage as an unwelcome government intrusion into the free market, while most liberals consider it crucial to alleviating poverty and fostering a middle class.

According to the U.S. Department of Labor, 1.3 million workers earned exactly the federal minimum wage of $7.25 per hour in 2014. Another 1.7 million earned wages below that rate. (The law allows various exemptions to the minimum wage, such as for restaurant servers, who earn most of their income through tips.) Based on a 40-hour workweek, a minimum wage worker earns about $15,000 a year. Many states have minimum wages above the national rate, such as California, which in March 2016 passed legislation raising the state's minimum wage to $15 an hour over the next six years. [See Department of Labor Information on Minimum Wage (primary source)]

President Barack Obama (D) has frequently advocated raising the federal minimum wage. In his State of the Union Address in 2015, he urged Congress to raise the wage from $7.25 to $10.10. "[T]o everyone in this Congress who still refuses to raise the minimum wage," he asserted, "I say this: If you truly believe you could work full-time and support a family on less than $15,000 a year, try it. If not, vote to give millions of the hardest-working people in America a raise."

President Obama's proposal, however, met with stiff resistance from opponents who argue that requiring companies to pay higher wages prevents them from hiring more workers, therefore increasing the overall unemployment rate and hurting the economy. Others, however, argue that providing workers with higher incomes stimulates the economy because those workers will spend more in the marketplace.

Is the minimum wage a good policy? Should the government increase the minimum wage, maintain it at its current rate, or abolish it altogether?

Supporters argue that having a minimum wage benefits the general economy because it puts more cash in the hands of workers who are likely to spend it, spurring economic activity and growth. The minimum wage, they contend, reduces poverty by providing higher wages for people who need them the most. The U.S. economy is still struggling, supporters maintain, making a higher minimum wage more important than ever.

Opponents, on the other hand, argue that the minimum wage distorts the labor market and increases the unemployment rate. Setting a minimum wage, they contend, makes it harder for unskilled workers to find jobs, because employers are forced to pay them more than their work is worth. The minimum wage is especially burdensome for small businesses, opponents add, which often cannot afford to pay higher wages.

The History of the Minimum Wage

In the 1890s, Australia and New Zealand became the first countries to enact national minimum wage laws. The push for laws to protect workers and improve their lives began in the United States in the 19th century, when new technology spurred the rapid growth of manufacturing in numerous industries. Workers in these industries typically toiled in harsh, dangerous, and overcrowded factories, conditions that spurred workers to form unions to push for laws regulating safety conditions, the length of the workday, and the right to organize. [See Unions and Labor Law]

The earliest American proponents of a minimum wage were labor leaders and the Catholic Church. In 1906, a priest named John Ryan published "A Living Wage," which argued that "the state has both the right and the duty to compel all employers to pay a Living Wage…its task is not merely to provide men with the opportunities that are absolutely essential to right living, but also to furnish as far as practicable the conditions of wider and fuller life."

Despite Ryan's use of the term "men," most of the early debate over the minimum wage focused on female workers. Many men found the notion of the government setting a minimum rate for which they could work offensive, but believed that women—whom they deemed less capable of negotiating a fair rate of pay—required a minimum wage.

In 1903, Oregon passed a law limiting the number of hours a woman could work at a job to 10 hours per day. Employers challenged the law, but the U.S. Supreme Court upheld it in 1908 in the case Muller v. Oregon. "In the struggle for subsistence," the Court ruled, a woman "is not an equal competitor to her brother…. [S]he is properly placed in a class by herself, and legislation designed for her protection may be sustained, even when like legislation is not necessary for men and could not be sustained."

Using the Muller decision as a rationale, Massachusetts enacted a minimum-wage law for women and children in 1912, the first such law in the United States. In 1918, Congress passed a law establishing a minimum wage for women and children in Washington, D.C., and by 1923, 16 states had enacted their own minimum-wage laws that applied to women and children.

In 1923, the Children’s Hospital of the District of Columbia, which paid its female workers less than the minimum wage, challenged the congressional law. In Adkins v. Children's Hospital, the Supreme Court struck down the law as unconstitutional, ruling that it violated the right of workers and employers to freely negotiate their own contracts without government interference. "Social-justice advocates regarded the decision as a major blow," journalist Conor Friedersdorf wrote in the Atlantic in February 2013. "In ensuing years, it would frustrate at least a dozen state legislatures and multiple presidents, and help fuel a historic attempt to undermine the U.S. Supreme Court. It would also be hailed by its defenders as a sensible defense of individual liberty in employment. "

The minimum wage became a central issue the 1930s when the United States plunged into the Great Depression, a severe economic slump that lasted throughout the decade. President Franklin D. Roosevelt (D, 1933–45) promoted a set of social programs, collectively known as the New Deal, to help lift the country out of the depression. As support for laws to combat poverty, protect workers' rights, and regulate industry increased, the push for a federal minimum wage gained momentum.

The Supreme Court, however, invalidated many of President Roosevelt's economic initiatives, ruling that they violated the U.S. Constitution. Indeed, the Court had been consistently issuing conservative decisions for some time, ever since 1905, when in Lochner v. New York, it overturned a New York State law that limited the number of hours that bakers could work each week to 60. Over the next 30 years, which became known as the Lochner era, the Court repeatedly struck down laws intended to improve workers' lives. (Muller v. Oregon was one of the few exceptions.) [See Judicial Activism]

In Morehead v. New York ex rel. Tipaldo in 1936, the Supreme Court struck down a New York minimum-wage law, siding with laundromat owner Joseph Tipaldo, who had made his employees repay him the difference after the law required him to increase their wages. The law, the Court ruled, violated the right of individuals—employers and employees—to make contracts free of government intervention. The Morehead decision proved to be the catalyst for a series of events that ultimately ended the Lochner era. The ruling was "among the most unpopular ever rendered by the Supreme Court," historian Jonathan Grossman wrote in an account of the minimum wage on the Department of Labor website. "Even bitter foes of President Roosevelt and the New Deal criticized the Court."

In the aftermath of the Morehead ruling, President Roosevelt proposed a plan to expand the number of justices on the Supreme Court from 9 to 15 so that he could appoint new judges who would uphold New Deal measures. The plan met with widespread opposition, but in 1937, Justice Owen Roberts changed his vote at the last minute in West Coast Hotel Company v. Parrish to uphold a minimum-wage law in Washington State. The move, known as "the switch in time that saved nine," marked the end of the Lochner era and the beginning of the Court's acceptance of pro-New Deal and pro-labor legislation, including minimum-wage laws.

By the late 1930s, support for a national minimum-wage law was growing. "All but the hopeless reactionary," President Roosevelt asserted in 1937, "will agree that to conserve our primary resource of manpower, government must have some control over maximum hours, minimum wages, the evil of child labor, and the exploitation of unorganized labor."

In 1938, President Roosevelt signed the Fair Labor Standards Act (FLSA), which set a national minimum wage of 25 cents per hour. The law also established a 44-hour workweek, required employers to pay employees who labored more than eight hours higher wages for overtime work, and imposed strict regulations on the use of child labor.

The initial minimum wage included various exemptions, such as for service employees whose main source of income was tips. Other workers, such as farm laborers and domestic servants, were also exempt from minimum-wage requirements, though many of these were added in subsequent amendments to the FLSA. In 1949, for example, Congress extended the minimum wage to transportation workers, and in 1961, to retail workers. By 1975, more than 90 percent of the American workforce was covered by the minimum wage.

Congress has periodically increased the national minimum wage to keep pace with inflation. In 1939, for example, Congress raised it from 25 cents to 30 cents per hour, and in 1945 to 40 cents. In 1950, it rose to 75 cents, in 1956 to $1.00, and in 1963 to $1.25. By 1976, the minimum wage was $2.30, and it rose to $4.25 in 1991. In 1997, Congress increased the minimum wage to $5.15, where it remained for 10 years. In 2007, Congress passed the Fair Minimum Wage Act, which incrementally raised the minimum wage over the next two years, reaching $7.25 in 2009.

During the 1990s and 2000s, meanwhile, numerous states raised their minimum wages above the national level. By early 2016, 29 states and the District of Columbia had higher minimum-wage rates than the federal requirement of $7.25; California and Massachusetts had the highest minimum wages at $10.

In 2012, fast food workers in New York City organized to protest in support of a $15 per hour minimum wage. The movement spread to other cities, with workers in various industries demonstrating in favor of higher wages. In 2014, the cities of Seattle, Washington, and San Francisco, California, adopted plans to phase in a $15 minimum wage. Los Angeles, California, followed suit the following year. "What started in one city ultimately swelled to protests in 150 American cities." New York Times reporter Steven Greenhouse wrote in April 2016. "By many measures, it has become the biggest labor protest in decades, with a wide spectrum of supporters, from college students and inner-city workers to janitors and nursing-home aides."

Studies Reveal Conflicting Data on Minimum Wage's Impact

The economic effects of the minimum wage have been debated for decades. Numerous studies have analyzed its impact, often with contradictory results.

In 1977, Congress established the Minimum Wage Study Commission (MWSC), in which many economists conducted a series of studies analyzing the effects of the minimum wage on employment. The commission's report, released four years later, gathered a wide variety of research that analysts interpreted differently. A report by the libertarian think tank the Cato Institute, for example, quoted a 1982 survey of the MWSC by economists Charles Brown, Curtis Gilroy, and Andrew Kohen—all of whom contributed to the original commission report—concluding that studies "typically find that a 10 percent increase in the minimum wage reduces teenage employment by one to three percent." A paper by the more liberal Center for Economic and Policy Research in 2013, however, cited the same 1982 survey as finding that a 10 percent minimum-wage increase had reduced teen employment between 0 and 1.5 percent, had an even smaller impact on the employment of young adults, and had an unclear impact on adult employment. The MWSC report itself stated that "it is not clear whether one should expect the minimum wage to reduce adult employment, and if it does, the amount may be so small that it will not be detected with precision."

In 1994, labor economists David Card and Alan Krueger compared the rates of employment in New Jersey's fast-food industry before and after a statewide increase in the minimum wage. The study found minimal impact on employment. "The weight of this evidence," Card and Krueger wrote in their 1995 book Myth and Measurement: The New Economics of Minimum Wage, "suggests that it is very unlikely that the minimum wage has a large, negative employment effect."

Other experts, however, have disputed such interpretations of the data. In 2006, economists David Neumark and William Wascher published an aggregate review of more than 100 studies on the effect of the minimum wage. Although they found "a wide range of existing estimates," they nevertheless concluded that the "traditional view that the minimum wage reduces the employment of low-wage workers" was accurate.

It is difficult to reach clear conclusions on the impact of minimum-wage laws, researchers caution, because of the presence of many other variables that are nearly impossible to account for. Economists and policy makers remain divided on the issue of the minimum wage, disputing whether its effect on employment is positive, negative, or insignificant.

Some economists note that many minimum-wage earners are teenagers, who do not have children or families to support. Other economists, however, point out that most people earning the federal minimum are adults who often work multiple jobs and do have families to provide for. According to the Pew Research Center, teenagers made up 24 percent of minimum-wage earners in 2013.

In April 2016, California governor Jerry Brown (D) signed a law phasing in a $15 minimum wage, the highest in the country, by 2022. The impact this will have on wages and employment remains uncertain. "When I set out to interview economists about the effects of California's minimum wage hike," Vox reporter Timothy B. Lee wrote in April 2016, "I was expecting some strong disagreements. Instead, I found a broad consensus: California's hike is so large—and would result in a minimum wage so high—that no one really knows what will happen." The same month, New York governor Andrew Cuomo (D) made an agreement with leaders in the state legislature to raise the minimum wage to $15 in the New York City area and $12.50 in the rest of the state by 2021.

Supporters Argue: Minimum Wage Spurs Economic Growth and Helps Improve Living Standards

Supporters of the minimum wage argue that the United States' sluggish economy in recent years has made it more important than ever. In 2012, a group of economists, including former labor secretary Robert Reich and Nobel Prize–winning Columbia University professor Joseph Stiglitz, wrote an open letter urging Congress to raise the minimum wage. "At a time when persistent high unemployment is putting enormous downward pressure on wages," the economists wrote, "a minimum wage increase would provide a much-needed boost to the earnings of low-wage workers."

Studies contrasting the unemployment rates in states with different minimum wages, advocates note, have found little correlation between these rates and the minimum wage. New Yorker economics columnist John Cassidy noted in 2013, for example, that Nevada, which had a minimum wage of $7.25 per hour, had an unemployment rate of 10.2 percent, while Vermont, which had a minimum wage of $8.60, had an unemployment rate of 5.1 percent. "What these figures tell us," Cassidy concluded, "is that other factors, such as the overall state of the economy and how local industries are doing, matter a lot more for employment than the level of the minimum wage does."

A small increase in the minimum wage, supporters contend, could substantially improve the lives of millions of Americans. "For somebody who works a forty-hour week, and earns the minimum wage of $7.25," Cassidy noted, "setting the rate at nine dollars would increase his or her annual salary…to $18,720, which would be enough to push the person's work income above the poverty threshold for a family of three."

Indeed, proponents contend, the current minimum wage is simply too low for many Americans to live on. "I think if you work 40 hours a week, you have a right not to live in poverty," Senator Bernie Sanders (I, Vermont), a candidate for the 2016 Democratic nomination for president, said in July 2015, after introducing a bill to raise the federal minimum wage to $15 an hour. "The current federal minimum wage is a starvation wage. It's got to be raised to a living wage."

Supporters argue that increasing the minimum wage stimulates consumption, which is good for the economy. Paying low-income workers higher wages puts more money in their pockets, they contend, making them more likely to spend that money throughout the economy. A report from the Economic Policy Institute (EPI) in 2009 estimated, for example, that raising the minimum wage to $9.50 would generate $60 billion in sales and economic activity. "These results demonstrate that an increase in the minimum wage would not only benefit low-income working families," the EPI's Kai Filion concluded, "but it would also provide a boost to consumer spending and the broader economy."

Raising the minimum wage, advocates argue, would help reduce economic inequality in the United States, which has risen over the past several decades. "After decades of wage stagnation, virtually everybody agrees that increasing the incomes of middle-class families is a top priority," Cassidy wrote. "Putting a higher floor under wages won't solve the problem, but it can be part of the process of transitioning to a high-wage, high-productivity economy. When workers are paid more, they tend to work harder, and quit less steadily."

Some supporters of the minimum wage concede that drastically increasing the rate would indeed cause unemployment to rise but maintain that all current proposals to increase the wage are small enough to avoid doing any harm while potentially having substantial benefits. "[T]he current level of the minimum wage is very low by any reasonable standard," New York Times commentator and Nobel Prize–winning economist Paul Krugman wrote in 2013. "For about four decades, increases in the minimum wage have consistently fallen behind inflation, so that in real terms the minimum wage is substantially lower than it was in the 1960s. Meanwhile, worker productivity has doubled. Isn't it time for a raise?"

Opponents Argue: Minimum Wage Hurts the Economy and Increases Unemployment

Opponents of the minimum wage argue that it distorts the labor market by forcing employers to pay certain workers more than their work merits. Forcing companies to pay unskilled workers more than their labor is worth, they contend, causes companies to hire fewer of these workers. "If the government imposes a minimum wage on the labor market, those workers whose productivity falls below the minimum wage will find few, if any, employment opportunities," Mark Wilson of the libertarian think tank the Cato Institute wrote in a 2012 policy analysis. "The basic theory of competitive labor markets," he wrote, "predicts that a minimum wage imposed above the market wage rate will reduce employment."

The minimum wage, opponents argue, is unfair to employers, who lack the resources to pay it, and to workers who are willing to work for lower wages. "Let's suppose there's a teenager whom you as an employer would be perfectly willing to hire for a dollar fifty an hour," Nobel Prize–winning economist Milton Friedman said in an interview in 1973, when the minimum wage was $1.60. "But the law says no, it's illegal for you to hire him at a dollar fifty an hour. You must hire him at a dollar sixty. Now, if you hire him at a dollar sixty, you're really engaging in an act of charity.… That's something few employers, quite naturally, are willing to do or can afford to do without being put out of business by less generous competitors."

Critics contend that the minimum wage harms small businesses, which find it more difficult than larger companies to pay higher wages. After President Obama proposed raising the minimum wage in 2013, the trade group the National Federation of Independent Business issued a press release stating, "A government mandate such as this would need to be completely absorbed by small business owners, who are already operating on razor-thin margins."

The minimum wage is an ineffective means of fighting poverty, opponents argue, because it only affects a limited number of workers. Many impoverished people in the United States do not have jobs, they point out, so they will gain nothing from a higher minimum wage. "A majority of our country's poor don't have employment," Politico commentator Michael Saltsman wrote in 2013, "and thus won't benefit from a raise."

Critics further argue that businesses forced to pay workers a higher minimum wage will find alternative ways to cut back, which will penalize other employees. "Some firms partially offset increases in the minimum wage by awarding smaller than normal pay increases to their workers who earn more than the minimum wage," the Cato Institute's Wilson wrote. "Some firms try to increase worker productivity by requiring better attendance, insisting that job duties are completed faster, imposing additional tasks on workers, minimizing hours worked with better scheduling, and terminating poor performers more quickly."

Opponents also contend that raising the minimum wage can force unskilled workers out of the marketplace by encouraging more experienced workers to compete with them for employment. "[W]e have to remember that a lot of minimum-wage jobs are jobs where people start, and in those jobs they learn skills to move forward," Carly Fiorina, former chief executive of Hewlett Packard and a candidate for the Republican nomination for president in 2016, said during a speech in 2015. "So we need to be honest about the consequences of raising the minimum wage too high. One of the consequences is that young people who are trapped in poor neighborhoods will have less opportunities to learn skills and move forward."

The free market alone, opponents argue, is sufficient to set proper wage rates without any mandates from the government. "[B]asic economics shows that competition between employers for workers can be very effective at preventing businesses from misbehaving," Christina Romer, a former economic adviser to President Obama, wrote in 2013. "If every other store in town is paying workers $9 an hour, one offering $8 will find it hard to hire anyone…. Robust competition is a powerful force helping to ensure that workers are paid what they contribute to their employers' bottom lines."

Outcome of Minimum Wage Increases Uncertain

It remains to be seen how the recent increases to the minimum wage in California and New York will affect the economies in those states. Some observers, however, predict that the increases will likely prompt other states to raise their minimum wages as well. "Once California and New York go, it is likely that more states will follow," Paul Sonn, a lawyer for the National Employment Law Project, a nonprofit group that advocates for low-wage workers, told the New York Times in April 2016.

Raising the national minimum wage, meanwhile, would require an act of Congress as well as the support of the president. The likelihood of such a measure passing largely depends on the outcome of the legislative and presidential elections that will be held in November 2016.

Bibliography

Cassidy, John. "The Case for a Higher Minimum Wage." New Yorker, February 14, 2013, www.newyorker.com.

Filion, Kai. "A Stealthy Stimulus: How Boosting the Minimum Wage Is Helping to Support the Economy." Economic Policy Institute, May 28, 2009, www.epi.org.

Fitzpatrick, Laura. "The Minimum Wage." Time, July 24, 2009, www.time.com.

Friedersdorf, Conor. "The Epic, Surprisingly Sexist Fight That Brought the Minimum Wage to America." Atlantic, February 18, 2013, www.theatlantic.com.

Greenhouse, Steven. "How the $15 Minimum Wage Went from Laughable to Viable." New York Times, April 1, 2016, www.nytimes.com.

Grossman, Jonathan. "Fair Labor Standards Act of 1938: Maximum Struggle for a Minimum Wage." United States Department of Labor, Accessed April 26, 2013, www.dol.gov.

Krugman, Paul. "Raise That Wage." New York Times, February 17, 2013, www.nytimes.com.

Lee, Timothy B. "California just passed a $15 minimum wage. Even left-leaning economists say it's a gamble." Vox, March 31, 2016, www.vox.com.

Roller, Emma. "Carly Fiorina: Raising the Minimum Wage Will Lead to 'Less Opportunity.'" Atlantic, August 17, 2015, www.theatlantic.com.

Romer, Christina. "The Business of the Minimum Wage." New York Times, March 2, 2013, www.nytimes.com.

Saltsman, Michael. "Minimum Wage Rise Poorly Targeted." Politico, March 13, 2013, www.politico.com.

Schmitt, John. "Why Does the Minimum Wage Have No Discernible Effect on Employment?" Center for Economic and Policy Research, February 2013, www.cepr.net.

Wilson, Mark. "The Negative Effects of Minimum Wage Laws." Cato Institute, September 2012, www.cato.org.

Additional Sources

Additional information about the federal minimum wage can be found in the following sources:

Ehrenreich, Barbara. Nickel and Dimed: On (Not) Getting By in America. New York: Henry Holt and Company, LLC, 2001.

Neumark, David, and William L. Wascher. Minimum Wages. Cambridge, Mass.: Massachusetts Institute of Technology, 2008.

Contact Information

Information on how to contact organizations that either are mentioned in the discussion of the federal minimum wage or can provide additional information on the subject is listed below:

Cato Institute
1000 Massachusetts Ave. N.W.
Washington, D.C. 20001
Phone: (202) 842-0200
Internet: www.cato.org

Center for Economic and Policy Research
1611 Connecticut Ave. N.W.
Suite 400
Washington, D.C. 20009
Phone: (202) 293-5380
Internet: www.cepr.net

National Bureau of Economic Research
1050 Massachusetts Ave.
Cambridge, Mass. 02138
Phone: (617) 868-3900
Internet: www.nber.org

Keywords

For further information about the ongoing debate over the federal minimum wage, search for the following words and terms in electronic databases and other publications:


Cost-of-living increase
Labor movement
Living wage
Poverty
Unemployment