For more than a century, lawmakers have been passing minimum wage laws. Minimum wage is the lowest amount per hour that bosses can pay their employees. Many people do not like the idea of minimum wages and have warned of their hidden costs. The argument continues from Washington to London to Berlin: Does a minimum wage lead to better lives or fewer jobs?
Does it lead to more people becoming wealthier, or fewer? Can you safely ignore the downside of higher labor costs as if there’s no law of supply and demand, which would tie wages to the supply of and demand for workers? The answer, after decades of sifting through data by economists, is a surprising maybe. Economists study the creation, use and movement of money.
Twenty-eight countries report minimum wage data to the Organisation for Economic Co-operation and Development (OECD). OECD is focused on improving the financial and social well-being of people around the world. The U.S. rate, $7.25 an hour, is 10th highest in real dollars, which eliminate the effects of inflation, or rising prices. The U.S. minimum wage is behind the U.K.’s minimum wage of about $10, and Australia’s of about $12.
More telling: When the minimum wage is measured as a share of average wages, the U.S. ranks 25th, at 37 percent. It is tied with Mexico and ahead of only the Czech Republic. High-wage Germany adopted its first minimum wage, about $9, in 2014. Swiss voters rejected a proposal in 2014 to establish the world’s highest minimum wage, $25 an hour. The details are different. The argument is the same: Do wage floors, or minimum wages, help or hurt the economy?
In his 2013 State of the Union address, President Barack Obama challenged Congress to boost the federal minimum wage to $10.10 per hour. Washington Republicans did not take to the idea kindly. A year later Obama set a $10.10 minimum wage for people doing business with the federal government. He also called on mayors and governors to “give America a raise.” Voters in four states did. By the start of 2016, 29 states and more than a dozen U.S. cities had minimum wages higher than the federal rate.
In March, California’s governor and state lawmakers reached a deal to increase the state’s minimum wage to $15 an hour by 2022. New York then enacted similar legislation. It required an increase to $15 by 2019 in New York City and 2022 in the suburbs. The minimum wage for the rest of the state must rise to $12.50 by 2021.
The U.S. federal minimum wage has been raised 22 times since Congress created it in 1938 at 25 cents an hour. The most recent increase was voted for in 2007. Economists have been arguing about it all along. What no one disputes is that the buying power of the wage has declined. Adjusted for inflation, the value peaked in February 1968 when it was $1.60, about $10.91 in 2015 dollars. Some studies conclude that higher wage floors lead to fewer jobs. That was what most people believed until the 1990s, when a flurry of new state minimums exceeding the federal rate gave researchers more ways to study the effects of wage hikes on communities that are near one another. An important 1994 report compared employment at fast-food outlets in New Jersey and Pennsylvania two years after New Jersey raised its hourly minimum wage from $4.25 to $5.05. Job prospects improved for low-wage workers in New Jersey. The government released a mixed analysis in 2014 that found that adopting a $10.10 minimum wage nationwide would lift 900,000 people out of poverty while eliminating 500,000 low-income jobs.
People who like minimum wages argue that workers aren’t the only people who benefit. They say companies that rely on low-skilled labor, such as Walmart and McDonald’s, enjoy lower turnover and increased consumer spending as people use bigger paychecks to buy more stuff. Fewer workers would need food stamps and other government aid to make ends meet, maybe.
Somewhere along the line, someone has to bear the cost of higher wages. A large burden would fall on the low-skilled and working poor if they had fewer jobs available to them. Wage mandates nibble at corporate profits, increase prices or both. The minimum wage is not an effective tool for getting people out of poverty because so many of the people who benefit, such as teenagers and part-timers, are not actually poor.
While economists debate over who picks up the check, though, the debate is becoming less relevant in the real world. Not many Americans work for $7.25 an hour these days. In 2015, just 3.3 percent of the country’s 78.2 million hourly workers earned that amount.