On the Rise: The Impact of Increasing the Minimum Wage

Posted by learninghouse on August 17, 2015  /   Posted in Business


Raising the minimum wage is a salient topic for the government at both the state and federal levels. Opponents worry that it will damage the economy, hurt small businesses and make goods too expensive, stifling economic growth. Yet over the past several years, many American states and cities have implemented legislation increasing the minimum wage; most recently, Los Angeles raised the minimum wage to $15.37 per hour. Setting a minimum wage is not a new concept: Since the federal government instituted a minimum wage in 1938, it has increased 22 times, with states tending to follow suit. With this in mind, what is the historical precedent for raising the minimum wage, and what will doing so mean for workers and businesses?


The Minimum Wage Explained

Congress introduced the minimum wage as part of the Fair Labor Standards Act (FLSA) in 1938. At its inception, the wage was set at 25 cents an hour. In 2007, the last time the minimum wage was increased, Congress raised the rate in steps. For the first year, the wage was raised to $5.15 an hour; after that, it was increased to $7.25 in July 2009. By January 2015, there were 29 states with a minimum wage higher than the federal rate. This means that from 2014 to 2015, nine states increased their minimum wage through automatic adjustments, while increases in 11 other states occurred through legislative or ballot changes. Adjusted for inflation, the federal minimum wage peaked at about $10 in 1968, as measured in 2014 values. This means that today’s minimum wage is more than a dollar less than its historical high.

In general, Congress raises the federal minimum wage during times of economic growth and low unemployment rates. For example, it passed a minimum wage increase in 1990 when unemployment stood at just 5.4 percent. In 2007, unemployment was at 4.4 percent. However, many states also have their own minimum wage laws. If an employee is under the jurisdiction of both the state and federal minimum wage laws, they are entitled to the higher of the two, according to the U.S. Department of Labor.

The Department of Labor reports the states whose minimum wage is above or below the national average. The states with the highest minimum wage include:

 

 

Georgia and Wyoming have a minimum wage ($5.15) that is less than the federal rate. Five states — Alabama, Louisiana, Mississippi, South Carolina and Tennessee — do not have a minimum wage, so employers must pay the federal rate.

New York State

Although it is not quite the highest in the country, the minimum wage was raised to $8.75 effective Dec. 31, 2014. It will increase to $9 by the end of the year. Governor Andrew Cuomo and New York City Mayor Bill DeBlasio have each proposed to raise the minimum wage even higher. A panel appointed by Cuomo recommended in July 2015 to raise the minimum wage for fast-food employees to $15 throughout the state. This would occur in stages over the next few years. This recommendation is expected to be approved by the state’s acting commissioner of labor, reports The New York Times. The increase would represent a more than 70 percent raise for the fast-food workers currently earning the state’s minimum wage of $8.75 per hour. Experts say that this could quickly lead to raises for employees in other industries throughout the state. Cuomo also believes that other states may follow his lead. He told the Times, “When New York acts, the rest of the states follow. We’ve always been different, always been first, always been the most progressive.” Although the state proposal applies to fast-food chain restaurants only, DeBlasio’s proposal for a $15 minimum wage in New York City would apply to all industries. Other cities in recent years have enacted legislation to create a local minimum wage that is higher than both the federal and state rate: Chicago, Seattle, Los Angeles, Kansas City and Louisville, to name a few.

Legislation at the National Level

These city and state wage increases are significant, but changes on the national level could be forthcoming as well. In 2013, the Fair Minimum Wage Act was introduced in the Senate. If the bill became law, it would increase the federal minimum wage for all employees to $10.10 in the two years after passage. During the third year, it would increase again based on the secretary of labor’s evaluation, which would be based on increases in the Consumer Price Index. Even more significantly, the act would allow for a reevaluation and increase annually from the third year onward. The proposed legislation would also increase the federal minimum wage for tipped employees to $3 for one year, and it provides a formula for subsequent adjustments annually thereafter. This would ensure that the wage remains equal to 70 percent of the wage in effect under the FLSA for other employees.

 

About 28 million workers would benefit from an increase of the minimum wage – with more than 19 million earning less than $10.10 and benefiting directly, and an additional 9 million low-wage workers benefiting from the ‘ripple effect’ of an increase.

 

A Year of Action: Progress Report on Raising the Minimum Wage
Executive Office of the President

According to the White House, raising the minimum wage to the proposed amount would increase earnings for 28 million people, while boosting the economy through increased consumer activity. In addition, it projects that 19 million workers would see a direct wage increase. At the current minimum wage, a full-time worker earns $14,500 a year. This means that, when adjusted for inflation, the rate has fallen by nearly one-third since its peak in 1968. Supporters of the Fair Minimum Wage Act suggest that increasing the minimum wage will spur quick economic growth. The White House also reports that the increases already implemented in states like New York will benefit roughly 7 million employees by 2017.

Effects of Raising the Minimum Wage

The Department of Labor provides a look at some of the positive outcomes of raising the minimum wage, based on both past and very recent wage increases. Its data suggests that increasing the minimum wage is “an important part of strengthening the economy.” The labor department also projects a variety of social benefits. The following is some of the information on the department’s website:

  • In California, employers are required to pay servers the full minimum wage of $9 per hour before tips. Even with the increase in minimum wage, the National Restaurant Association projects California restaurant sales will outpace the U.S. average.
  • Employers in San Francisco must pay tipped workers the full minimum wage of $10.74 per hour before tips. The San Francisco restaurant industry has experienced positive job growth over the past few years, according to the Bureau of Labor Statistics.
  • The demographic of minimum wage workers has changed: 88 percent of those who would benefit from a federal minimum wage increase are age 20 or older, and 55 percent are women. In addition, 53 percent of all minimum wage earners are full-time workers.
  • Data does not suggest that raising the minimum wage will cause job loss: A review of 64 studies on minimum wage increases found no discernable effect on employment.
  • Minimum wage increases have little to no negative effect on employment as shown in independent studies. Academic research has shown that higher wages sharply reduce employee turnover, which can reduce employment and training costs for businesses.

The long-term outcomes of recent increases remain to be seen; however, federal, state and local government legislation continues to move toward raising the minimum wage. Whether positive or negative, this trend will have a direct impact on businesses of all sizes and in all industries.


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