The Federal And State Minimum Wage Growth, And Inflation

The Federal and State Minimum Wage Growth, and Inflation

For some time now, the United States House and Senate has predominately been controlled by the Republican Party. The November 2006 elections changed that. After the elections the Democratic Party gained control of both. With that came the issue of the federal minimum wage. Democrats wanted to increase the minimum wage from $5.15/hr to $7.00/hr. This was a highly debated topic, because many Americans, myself included, didn’t feel that the minimum wage coincided with the cost of living or the inflation rate. The two parties were basically split, by party, on whether or not to vote for the increase. Both had valid points for and against, and the vote was close. However the change was not voted through, and for right now it remains at $5.15/hr at the federal level. Although it didn’t pass federally, individual states were able to bring about their own change. Those against the increase argued that the effects of an increase might hurt the economy. In this paper I’ll examine the history of the minimum wage, arguments for a minimum wage increase, and some of the arguments against an increase.

Throughout the history of the minimum wage there have been numerous increases at the federal level. However, the rate of inflation has also grown at a rapid rate and throughout time has actually worn the buying power of the minimum wage. Today’s minimum wage rate pales in comparison to what it was worth in the early stages of the minimum wage.

The federal minimum wage was introduced in the Fair Labor Act of 1938, and although the cost of living has increased substantially since it was put into effect, the federal minimum wage has not increased with the same vigor. In 1980 and 1981 the minimum wage went from $3.10-$3.35 respectively, without another increase until 1990 when President George H.W. Bush signed an increase in 1990, increasing it to $3.80/hr. Throughout the 1990’s there were three increases at the federal level; 1991 up to $4.25, 1996 up to $4.75, and the last increase at the federal level was in 1996 when President Bill Clinton increased it up to $5.15/hr.

The inflation that has occurred since that increase has now fully eroded that increase. In 2004, the federal minimum wage in comparison to the average wage was 33 %, which is the lowest value since 1949. (Economic Policy Institute [EPI], 2006). There have been federal minimum wage increases since 1938, but since it is not indexed with inflation, the buying power of the minimum wage declines as inflation rises. (Economic Policy Institute [EPI], 2006) This shows that the federal minimum wage fails to grow at the same rate as the cost of living

After nearly a decade with no increase in the minimum wage, inflation has worn the buying power of the minimum wage by 17 percent. A full-time minimum-wage job no longer lifts a family above the poverty level. In 2005, a family of three with one adult working at minimum wage was deep in poverty (at only 67 percent of the poverty level). In comparison, that same family in 1969 earned 114 percent of the poverty level. If the minimum wage had kept pace with inflation since 1969, when it was $1.60 an hour, today it would be $8.88(“Iowa’s Minimum Wage: What’s at Stake,”2006).

The federal government’s continued contest of an increase does have some merit. At the federal level they argue that each state has the right to set their own minimum wage; so why change it federally? There are already a number of states with a higher minimum wage than that at the federal level so I am assuming that they expect other states to follow suit. Also prime beneficiaries would be women and minorities and a lot of politicians could care less about helping that demographic. Whatever their arguments against may be, a raise would definitely benefit a number of workers. While at the federal level, they might argue these points as arguments against an increase. I see them as arguments for an increase.

Although the federal minimum wage has not increased since 1996, all states have the right to raise their state minimum wage through legislation. Over half the states in the country seem to believe that the federal minimum wage is too low. (U.S. Dept. of Labor [DOL], 2007) Included in that half are the states of California, whose minimum wage is currently $7.50/hr, (with an increase to take place January 1st, 2008 to $8.00), Illinois, (who already has a plan set to raise it to $8.25 come January 1st,2010 through a three year plan), and Iowa (who as of the November 2006 elections, voted to implement a two part wage increase; which as of April 1st 2007 boosts the state minimum wage to $6.20/hr, ultimately raising it to $7.25/hr on January 1st 2008). These are just three of the 29 states that obviously feel the federal minimum is not up to par (U.S. Dept. of Labor [DOL], 2007).

Twenty nine states and the District of Columbia have a minimum wage that exceeds the federal rate. Three of those states are Iowa’s high-growth neighbors: Wisconsin, Minnesota and Illinois. Nevada voters are expected to approve a minimum wage increase in November (for the second and final time) in order to become the 29th state with a minimum wage higher than the federal level. In North Carolina, Ohio, and several other states, legislation is pending or a ballot initiative is in the works (“Iowa’s Minimum Wage: What’s at Stake,”2006).

An increased minimum wage would especially benefit women and people of color. About 12.6 percent of working women, 11 million women, and their families would be directly affected by a one dollar increase in the minimum wage. Similarly, 18.1 percent of African American workers and 14.4 percent of Hispanic workers would directly benefit from such an increase. (Center for Policy Alternatives [CPA], 2007)

Challengers of an increase do have some valid arguments. Some of those arguments are that an increase may hurt employers. They also feel that an increase may hurt the economy by driving up the price for goods and services, as well as failing to hit the target demographic.

The current minimum wage strains state public assistance programs. Minimum wage workers and their families must rely on public assistance to survive. They need Medicaid, subsidized housing, childcare programs, and free school lunches. If the wage was raised, it would require employers to shoulder responsibility for the basic needs of their employees, thereby lowering costs for states and taxpayers, but in the long run hurting the businesses that have to now offer these benefits. (Center for Policy Alternatives [CPA], 2007)

Even though the wage increase is ultimately designed to help low income workers, opponents