The Economy Hub
12:09 AM EDT, June 29, 2013
Let us now praise one of the many legacies that prove that, in addressing its citizens' economic dignity, the America of the Thirties was smarter and more humane than the America of today.
The example at hand is the minimum wage law.
The federal minimum wage celebrated its 75th birthday last week. The wage was enacted as part of the federal Fair Labor Standards Act, which arrived in 1938 just as the New Deal was running out of steam. The landmark measure banned child labor, set the maximum workweek at 44 hours, and imposed a minimum wage of 25 cents an hour.
Today the federal minimum is $7.25, which on an inflation-adjusted basis is better than the 1938 rate, but as a full-time wage barely stands above the poverty line. In his State of the Union address this year, President Obama urged raising it to $9 an hour. Two congressional Democrats, Sen. Tom Harkin of Iowa and Rep. George Miller of Martinez, Calif., have proposed going all the way to $10. Both proposals would index the rate to inflation.
Does $9 or $10 sound high? Consider that if the minimum wage had merely kept pace with worker productivity gains since 1968, it would be more than $16.50 today. One way or the other, the minimum wage isn't what it used to be. In inflation-adjusted buying power, it peaked in 1968, when the nominal rate was $1.60. That's the equivalent of $10.70 in today's dollars. Since then, it's been on an erratic path downward. The federal rate hasn't been increased since 2009.
The federal rate applies to employees of businesses with more than $500,000 in annual revenue or that engage in interstate commerce. It also governs pay for workers at all levels of government. That's true even in states with their own minimum wage laws — the workers get the state or federal rate, whichever is higher.
At the moment, 22 states use the federal wage, four set theirs lower (making their own rates largely obsolete) and 19 states and the District of Columbia set theirs higher. That group includes California, where the rate is $8 an hour; a raise to $9.25 passed the state Assembly last month and awaits action by the Senate. California is outstripped by six states, with Washington's inflation-indexed minimum wage, currently $9.19, topping the list. (Five Southern states have no minimum wage law, so the federal rate applies.)
The new campaign to increase the minimum wage has drawn the familiar arguments against it out of the academic shadows and back into the public debate. They have a long history. In a fireside chat the night before he signed the bill, Franklin Roosevelt took their measure, urging his listeners to ignore the nattering of "any calamity-howling executive with an income of $1,000 a day" telling them "that a wage of $11 a week is going to have a disastrous effect on all American industry."
Who's leading the charge against a minimum wage increase today? The restaurant industry, which includes such fast-food mega-companies as McDonald's and Yum Brands (owner of KFC, Taco Bell and Pizza Hut), both of which are earning higher profits now than before the recession.
The most common objection to a higher minimum wage always has been that it leads to lower employment. This is one of those "everybody knows" talking points, and it does have a strong intuitive appeal. Stands to reason, doesn't it? Require business owners to spend more on each employee, and of course they're going to spread it among fewer people.
As it happens, the employment effect of the minimum wage is "one of the most studied topics in all of economics," observes economist John Schmitt. So it's curious that, despite decades of searching, economists have failed to document consistently any such phenomenon.
By and large, economic studies find that there's either no effect on overall employment rates whatsoever, or that the effect is too small to measure accurately and most likely swamped by more powerful factors, including the economic cycle.
To be fair, the debate over these findings is vigorous. David Neumark of UC Irvine is an often-cited authority for the idea that "minimum wages pose a trade-off of higher wages for some against job losses for others."
There's even some evidence that a higher minimum wage may increase employment by putting more money in the pockets of low-wage earners, thus strengthening the economy, though the strength of the effect is hard to pin down. In any case, smart employers know that better wages cut absenteeism and worker turnover and raise productivity, all of which flow to the bottom line.
Many of the debating points made by critics of the minimum wage have the unmistakable scent of picked cherries. Last week, at a hearing before the Senate Committee on Health, Education, Labor, and Pensions, James Sherk, a policy analyst for the right-wing Heritage Foundation, cited the experience of American Samoa in defense of the idea that a higher minimum wage leads to more unemployment.
You couldn't find a more special case than Samoa, or one where the evidence is so murky. The South Pacific territory has long been subject under federal law to its own special minimum wage, several dollars below the standard. (It's currently a little over $4.)
Around the time that Congress started raising the Samoan rate to match the mainland's, the island's main industry, tuna canning, crashed. One of its two canneries closed and the other sharply cut its payroll; both employers blamed the minimum wage.
Their claim was dubious. The cutbacks coincided with the worldwide economic slump, spiking fuel prices and lowered U.S. tariff barriers for non-Samoan tuna.
Some of these factors affected other industries — tourism visits to the island and neighboring destinations, for instance, dropped by half from 1997 through 2009, according to the General Accounting Office, presumably not because resort workers were getting a few cents more per hour. Picking out the minimum wage from all these trends and blaming it for the Samoan slump is a stretch at best. But here's a safe bet: The sketchy Samoan case will be hauled out as exhibit A by congressional opponents of a minimum wage hike.
What's undeniable is that the minimum wage improves the lives of those who earn it, reducing poverty and narrowing pay inequality. That doesn't seem to be reason enough for conservatives to get behind it. To hear them talk, giving workers a $1.25 hourly raise would break the nation, although we've managed to muddle through a three-decade period in which average CEO compensation rose 725%. Perhaps it's limiting the increase in the average wage-earner pay to only 5.7% in that time that kept America from sinking beneath the waves.
"In the wealthiest nation on Earth," President Obama observed in his State of the Union message last January, "no one who works full-time should have to live in poverty." The argument against raising the minimum wage today boils down to the notion that it's all right for the lowest-earning workers in America to live in poverty. But the country has changed a lot since 1938.
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