Minimum Wage Impact

Introduction

Supporters of increasing the federal minimum wage contended it would offer significant changes to the lives of millions of working-class Americans. Opponents insisted the measure would cost the economy hundreds of thousands of jobs and provide only marginal help to a relatively small group of wage earners. The numbers suggest the answer lies somewhere in between. Increases in the minimum wage sometimes have been followed by dramatic spikes in the nation's unemployment rate, as was the case in the early 1980s, as well as lulls or even decreases in unemployment, as happened in the late 1990s. Contrary to its more recent stagnation, the minimum wage increased almost annually in the 1960s and 1970s, hitting an inflation-adjusted high of $1.60 ($9.27 in 2007 dollars) in 1968 and staying around that level through the following decade, according to the U.S. Bureau of Labor Statistics. During the 1970s, seasonally adjusted unemployment varied wildly, from 3.9 percent in January 1970 to 8.1 percent in 1975 and then back down to 5.9 percent in 1979. The wage grew to $3.35 an hour in 1981, but would not budge from there until 1990. Following the 1981 increase, national unemployment hit its highest rate since the Depression. The minimum wage held steady throughout the soaring unemployment rates of the early 1980s, including the 10.4 percent posted in January 1983. The 1990s opened with two more minimum-wage increases, and unemployment zoomed. Then the minimum wage increased $5.15 in 1997, when unemployment dipped to 4.7 percent. See Table 1.

Table 1

Finally in 2007 the federal government has passed legislation that increases the minimum wage, the first increase in the national minimum wage in a decade. In addition, a number of states have recently increased the minimum wage to a rate higher than the federal level. Over a two year period, the minimum wage will be increasing from $5.15 per hour to $7.25 per hour, in a series of three increments: Summer 2007 - increase to $5.85/hour; Summer 2008 - increase to $6.55/hour; Summer 2009 - increase to $7.25/hour.The numbers as recorded by the BLS leave many analysts at odds over the cause-and-effect relationship of what happens to the economy when the government increases the minimum wage and what is the impact on employment .

1 Determining the Minimum wage

The minimum wage is a provision of the Fair Labor Standards Act (FLSA). This law, which was passed in 1938, originally set a minimum wage of $0.25 per hour and also set standards regarding overtime pay and child labor.

Minimum wage increases are passed at the will of Congress as amendments to the FLSA.Original proposals for the FLSA provided for a commission that would set the minimum wage after a public hearing and consideration of cost-of-living estimates provided by the Bureau of Labor Statistics. In this way, the minimum wage would have been updated according to changes in the standard of living and inflation. However, the version of the FLSA that passed set a specific rate and had no provisions regarding updating the minimum wage.

Therefore, any increases in the minimum wage are based solely on the political climate and congressional agreement that an increase is needed. The frequency of minimum wage increases has varied; for example, in the 1970s, there were five increases to the minimum wage, but during the 1980s there were only two increases.

1.1 Difference between directly and indirectly affected workers

Table 2

Directly affected Indirectly affected

1. Refers to those earning less than $7.25 per hour and thus would receive an immediate raise following the passage of a federal minimum wage increase.

2. The number of workers predicted to be affected by an increase in the federal minimum wage is based on EPI research into the effects of past minimum wage increases at the state and federal level over the last 20 years. 1.Refers to those who are earning within a few dollars above the proposed minimum wage. While a raise is not legally mandated for these workers, empirical evidence shows that many employers raise the wages of workers earning above the new minimum wage in order to preserve internal wage structures, an occurrence known as the "spillover effect."

2.The number of workers indirectly affected by a federal minimum wage increase is calculated separately for each state (because evidence shows the spillover effect depends on the existing local wage structure) and summed together. In general, the spillover effect is modest and isolated within the bottom fifth of workers in the hourly wage scale.

1.2 Difference between the minimum wage and a living wage

Table 3

Minimum wage Living wage

Is a wage floor of $5.15 an hour that applies to almost all workers.

Thirty states including the District of Columbia have set a minimum wage that is higher than thefederal minimum wage. Is a term often used by advocates to point out that the federal minimum wage is not high enough to support a family. Some advocates have attempted to calculate a living wage based on an income that would provide for a family's basic needs

These "living wages" are generally much higher than the minimum wage. They commonly refer to wages set by local ordinances that cover a specific set of workers, usually government workers or workers hired by businesses that have received a government contract or subsidy.

Table 4

* Insufficient sample size to estimate. In these cases, higher state minimum wages

lessen the impact of a federal increase.

** Includes both directly and indirectly affected workers.

Table 5

1.3 Workers covered by the minimum wage

Ð'* The