Home » Citizen Zane » What is a Reasonable Level for the U.S. Minimum Wage?

What is a Reasonable Level for the U.S. Minimum Wage?

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     There has been a Federal minimum wage in the U.S. continuously since 1938. The latest increase in the U.S. minimum wage was passed in the Senate on 2/1/2007, the bill passed 94-3. These facts seem to indicate that a minimum wage is fairly popular, and will be sticking around, regardless of whether some think it is a good idea or not. The state government here in Minnesota, as well as the governments of many other states and cities, is currently debating a minimum wage increase. Most of us regularly interact with and know people who make minimum wage or slightly above. As such, this article will attempt to reasonably ascertain what the U.S. minimum wage should be now and going forward, in comparison to historical data on minimum wage and average overall wage and salary income.

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    I see many historical minimum wage comparisons based on gross national product, inflation, or cherry-picking data from a particular year. I don’t feel any of these offer a reasonable historical comparison to the way things actually are. Individual pay rates or income have virtually nothing to do with gross national product, as far as I can tell, so it makes no sense to compare the two. U.S. government inflation rates are worthless for historical comparisons, as they changed many formulas used to figure inflation, starting in the 1980s. These numbers may be okay to compare the 2010s to the 1990s, or the 1950s to the 1970s, but are not accurate reflections of reality if comparing the 1960s to the 2000s. Then there are the ‘cherry-pickers’, any source which says something like “If it were like 1967 the minimum wage would be $23.45 per hour!” is just being sensationalistic and inaccurate, when one compares this information to an overall historical accounting of facts.

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     I feel a more accurate way to compare different eras would be to use actual W2 wage and salary information, and compare this to the minimum wage in effect at that time. One could use median or average income amount, I chose to use average, as it is slightly more accurate, simpler, and makes more sense to me. I ran some numbers with median data and got similar results, so averages will be used for the purposes of this article. As this data is from wages and salaries only, and not total average income, it is not skewed higher by income from rent, dividends, interest, capital gains, or other income sources. 61 years of SSA data should give an accurate representation of overall wage rates.

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     From Social Security Administration data going back to 1951, I compared national average individual income for a given year with what a worker making that year’s minimum wage made if working 2,000 hours. (40 hours x 50 weeks, 2 weeks off for vacation.) For example, in 1965, average income was $4,659, and minimum wage was $1.25. 2,000 hours at $1.25 per hour = $2,500. 4,659 divided by 2,500 = 1.86, which gives us the average wage to minimum wage ratio. This ratio ranged between 1.77 and 2.37 in every year from 1951 through 1983. The middle of this range is 2.07, so lets use that for future arithmetic.

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     2012 is the latest year this dataset includes, when the average individual income was $44,322. 44,322 divided by 2.07 = 21,412, divide by 2,000 hours and we get $10.71. Assuming increases similar to 2010 – 2012 in the average individual income for 2013 – 2015, the average income number will be around 48,400 in 2015. As any future changes in the minimum wage will most likely take effect in 2015 or later, this anticipated future figure should be contemplated as well. Applying the 2.07 ratio to the estimated 2015 income amount gives us $11.69 per hour. If future minimum wage law keeps the level the same for several years, as it often has in the past, it would seem reasonable to have the minimum wage increase to around $13 per hour, if one sees the 1951 – 1983 period as economically desirable, in general. It seems the people pushing for a $15 per hour minimum wage are right on the money, so to speak, as the first rule of any negotiation is to ask for more than you want. Applying the high and low ratios for the 1951-1983 period (1.77 and 2.37) and applying to the estimated average income for 2015, we see a range of $10.21 – $13.67. Going forward, the $10.10 level would seem to be a bit low, historically.

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     One of the arguments against raising the minimum wage says it would cause many businesses to fail due to not being able to meet payroll. Lets look back at the past to see if this holds true. From October 1, 1996 to September 1, 1997 the federal minimum wage increased twice by a total amount of 90 cents, a 21% increase from the previous $4.25 rate to $5.15. Remember how horrible this was? No one could eat out as every restaurant closed due to not being able to afford cooks and waitresses. Long lines at gas stations as they could not afford to pay cashiers. Every Walmart store closing since they could not afford to pay employees. Remember the stock market crash caused by the economic impact of the 21% increase of the minimum wage, and the huge spike in unemployed individuals? Oh wait, none of this actually happened. So how would one expect this to be different in 2014? The minimum wage has been raised over 20 times over the past 75 years. Did any of these other increases destroy the economy? If a U.S. business model cannot sustain a reasonable payroll for its workers, that business should rightfully fail, as thousands of businesses do every year. Another point to ponder: in 1997, approximately 7% of the U.S. workforce was paid minimum wage or less. That figure has dropped since then, and is a bit over 2% of the total U.S. workforce now. This indicates a similar increase would have much less impact on the overall economy now, when compared to 1997.

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     Lets conclude with a little food for thought exercise. If you currently earn minimum wage or a little above, or ever have in the past, raise your hand. (An imaginary hand-raising is fine for our purposes.) Next, if any of your family members or friends meet the above criteria, raise your hand. If you feel any of these people (including yourself) should be making less money, should have made less in said situation in the past, or actually have returned part of the wages paid, out of remorse, put your hand down. When in this situation, if any of these people refused a pay raise when offered to them, put your hand down. If you still have a hand raised, it would seem you support an increased minimum wage, if you are not a hypocrite.

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    “We stand for a living wage. Wages are subnormal if they fail to provide a living for those who devote their time and energy to industrial occupations. The monetary equivalent of a living wage varies according to local conditions, but must include enough to secure the elements of a normal standard of living–a standard high enough to make morality possible, to provide for education and recreation, to care for immature members of the family, to maintain the family during periods of sickness, and to permit of reasonable saving for old age.” –Theodore Roosevelt, 1912

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Data sources:

SSA National Average Wage Index, 1951-2012

http://www.ssa.gov/OACT/COLA/AWI.html

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Some information on why official inflation data is worthless for historical comparisons:

http://www.zerohedge.com/contributed/2012-12-04/washington%E2%80%99s-biggest-lie-and-why-it-continues-be-told

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History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938 – 2009:

http://www.dol.gov/whd/minwage/chart.htm

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Characteristics of Minimum Wage Workers: 2012

http://www.bls.gov/cps/minwage2012.htm#2

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*Pretty nifty* – Social Security Administration Wage Statistics for 1990-2012

http://www.socialsecurity.gov/cgi-bin/netcomp.cgi?year=2012

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Economic research finds little evidence in support of the hypothesis that an increase in minimum wages significantly affects employment – either positively or negatively.”:

http://www.nakedcapitalism.com/2014/01/minimum-wages-effects-employment-labour-force-turnover.html

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Misc:

http://oregonstate.edu/instruct/anth484/minwage.html

http://www.ssa.gov/history/trspeech.html(Teddy Roosevelt quote)

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4 Comments

  1. Nicely done. I like the revisions. And the thought exercise is illuminating.

  2. Reblogged this on five.minutes.til.midnight and commented:
    A fresh look at the minimum and living wage issue.

  3. AdamSmith says:

    Your thought exercise is absurd. It could have said “put down your hand if you don’t want to be a millionaire.” Does that justify a minimum wage which results in a nation of millionaires, simply because it is a populist ideal? Humans act in their own rational self-interest. Governments shouldn’t promote the whims of the have-nots on the backs of the haves because it is popular. Period.

    The way to settle this age-old argument once and for all is to raise the minimum wage at the state level, which is already the case in several states. The only reason the federal government wishes to impose a higher minimum wage is to broaden the tax base (increase taxes on the poor, while appearing to be helping them). It’s all driven by the desire to spend more money to maintain power.

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