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The Economic Case for Raising the Minimum Wage

Obama White House
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The minimum wage helps support family incomes, reducing inequality and poverty, but as a slide deck from the Council of Economic Advisers shows, as the real value of the minimum wage has been allowed to erode, it has stopped serving this important purpose.

The Economic Case for Raising the Minimum Wage

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The Economic Case for Raising the
Minimum Wage
Council of Economic Advisers

February 12, 2014
The Inflation-Adjusted Value of the Minimum Wage Has Fallen by a
Third From Its Peak
Minimum Hourly Wage for Nonfarm Workers
Dollars Per Hour
12
11

Real value peaked in 1968 and
has fallen by a third since then

10
Real
(Dec. 2013
Dollars)

9
8

7
6
5
4
3

Nominal

2
1
0
1960

1970

1980

1990

2000

2010

Source: Bureau of Labor Statistics; CEA calculations.

1
The Federal Minimum Wage Is Only About 36 Percent of the
Average Wage, Down From Its Peak of Over 50 Percent
Federal Minimum Wage Rate as a Percent of Average Wage
Percent
60%
55%

Feb-1968:
54%

50%
45%

40%
35%

Jan-2014:
36%

30%
25%
20%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Note: Based on average hourly wage for production and nonsupervisory workers.
Source: Bureau of Labor Statistics; CEA calculations.

2
Raising the Minimum Wage Would Benefit Over 28 Million
Workers From All Types of Households
Gender

Age 40-54
5.8 mil
21%

Age 30-39
4.7 mil
17%

$75k+
6.3 mil
22%

Male
12.7 mil
45%

Female
15.5 mil
55%

Age 55+
3.8 mil
13%

Family Income

Under $35k
12.8 mil
$35k-$75k
46%
9.0 mil
32%

Age
Less than 20
years old
3.4 mil
12%
Age 20-29
10.4 mil
37%

Teenagers
3.4 mil
12%

Unmarried
w/o kids
12.4 mil
44%

Family Structure

Married
w/kids
4.6 mil
16%

Unmarried
w/kids
2.8 mil
10%

Married w/o
kids
4.9 mil
18%

New estimates from CEA find that over 28 million workers would benefit from an
increase in the minimum wage. Of these, more than 19 million would benefit directly,
while the rest would benefit from the “ripple effect” of a shifting wage structure.
3
The Poverty Rate Has Fallen Because of Policies Like the Earned
Income Tax Credit and Nutrition Assistance, Not Wage Gains
Poverty Rate With and Without Tax Credits & Benefits
Percent
35%
1967
30%

27%

2012

29%
26%

25%
20%

16%
15%
10%

5%
0%
Without Tax Credits & Benefits

With Tax Credits & Benefits

Source: Wimer, et al. (2013).

The economy has expanded enormously without leading to progress in market-income poverty. Since 1967:
• Real per capita GDP up 128%
• Labor productivity up 142%
• Real per capita household wealth up 173%
One reason for the lack of progress is that the real value of the minimum wage has fallen more than a third from its peak
in the late 1960s. Going forward, raising the minimum wage and indexing it to inflation would help to raise wages and
reduce poverty.
4
A $10.10 Minimum Wage Would Raise a Family of Four With One FullTime Worker Above the Poverty Line Counting Their Tax Credits
Earnings of Full-Time Worker at Minimum Wage
Relative to Poverty Line for Family of Four
Dollars
30,000
5% Above Poverty Line

25,000
$6,050

17% Below Poverty Line
20,000
$6,200

Tax Credits

15,000
10,000
$14,500

Wages

$20,200

5,000

0

$7.25 Minimum Wage

$10.10 Minimum Wage

Note: Based on projected poverty threshold for a family of four in 2016. Does not include SNAP assistance.
Source: CEA calculations.

Raising the minimum wage to $10.10 would raise incomes for an estimated 12 million
people now in poverty, lifting 2 million of them out of poverty.
5
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The Economic Case for Raising the Minimum Wage

  • 1. The Economic Case for Raising the Minimum Wage Council of Economic Advisers February 12, 2014
  • 2. The Inflation-Adjusted Value of the Minimum Wage Has Fallen by a Third From Its Peak Minimum Hourly Wage for Nonfarm Workers Dollars Per Hour 12 11 Real value peaked in 1968 and has fallen by a third since then 10 Real (Dec. 2013 Dollars) 9 8 7 6 5 4 3 Nominal 2 1 0 1960 1970 1980 1990 2000 2010 Source: Bureau of Labor Statistics; CEA calculations. 1
  • 3. The Federal Minimum Wage Is Only About 36 Percent of the Average Wage, Down From Its Peak of Over 50 Percent Federal Minimum Wage Rate as a Percent of Average Wage Percent 60% 55% Feb-1968: 54% 50% 45% 40% 35% Jan-2014: 36% 30% 25% 20% 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Note: Based on average hourly wage for production and nonsupervisory workers. Source: Bureau of Labor Statistics; CEA calculations. 2
  • 4. Raising the Minimum Wage Would Benefit Over 28 Million Workers From All Types of Households Gender Age 40-54 5.8 mil 21% Age 30-39 4.7 mil 17% $75k+ 6.3 mil 22% Male 12.7 mil 45% Female 15.5 mil 55% Age 55+ 3.8 mil 13% Family Income Under $35k 12.8 mil $35k-$75k 46% 9.0 mil 32% Age Less than 20 years old 3.4 mil 12% Age 20-29 10.4 mil 37% Teenagers 3.4 mil 12% Unmarried w/o kids 12.4 mil 44% Family Structure Married w/kids 4.6 mil 16% Unmarried w/kids 2.8 mil 10% Married w/o kids 4.9 mil 18% New estimates from CEA find that over 28 million workers would benefit from an increase in the minimum wage. Of these, more than 19 million would benefit directly, while the rest would benefit from the “ripple effect” of a shifting wage structure. 3
  • 5. The Poverty Rate Has Fallen Because of Policies Like the Earned Income Tax Credit and Nutrition Assistance, Not Wage Gains Poverty Rate With and Without Tax Credits & Benefits Percent 35% 1967 30% 27% 2012 29% 26% 25% 20% 16% 15% 10% 5% 0% Without Tax Credits & Benefits With Tax Credits & Benefits Source: Wimer, et al. (2013). The economy has expanded enormously without leading to progress in market-income poverty. Since 1967: • Real per capita GDP up 128% • Labor productivity up 142% • Real per capita household wealth up 173% One reason for the lack of progress is that the real value of the minimum wage has fallen more than a third from its peak in the late 1960s. Going forward, raising the minimum wage and indexing it to inflation would help to raise wages and reduce poverty. 4
  • 6. A $10.10 Minimum Wage Would Raise a Family of Four With One FullTime Worker Above the Poverty Line Counting Their Tax Credits Earnings of Full-Time Worker at Minimum Wage Relative to Poverty Line for Family of Four Dollars 30,000 5% Above Poverty Line 25,000 $6,050 17% Below Poverty Line 20,000 $6,200 Tax Credits 15,000 10,000 $14,500 Wages $20,200 5,000 0 $7.25 Minimum Wage $10.10 Minimum Wage Note: Based on projected poverty threshold for a family of four in 2016. Does not include SNAP assistance. Source: CEA calculations. Raising the minimum wage to $10.10 would raise incomes for an estimated 12 million people now in poverty, lifting 2 million of them out of poverty. 5
  • 7. The Minimum Wage Affects Inequality – With Inequality Between Low/Middle-Income Historically Tracking the Minimum Wage Women's 50-10 Wage Gap vs. Real Minimum Wage Index, 1973=100 140 Index, 1973=100 (inverted) 65 2012 130 Women's 50-10 Wage Gap (left axis) 120 85 Real Minimum Wage (right axis, inverted) 110 75 95 100 105 90 115 80 70 125 60 135 1973 1978 1983 1988 1993 50th 1998 2003 2008 Note: The 50-10 wage gap is the ratio of income earned at the percentile to income earned at the Source: CEA calculations based on updated data from Lemieux (2007). 2013 10th percentile. Studies have shown that the minimum wage plays an important role in reducing inequality.  Important in the bottom of the wage distribution and for women (DiNardo, Fortin, and Lemieux, 1996).  Declining real value of the minimum wage explained roughly one-third to one-half of the increase in the 50-10 wage gap for women during the 1980s (Autor, Manning, and Smith, 2010). 6
  • 8. As of January 2014, 21 States + DC Have Higher Minimum Wages than the Federal and 11 States Index to Inflation During the 2013 legislative session, CA, CT, NY and RI passed legislation to provide for minimum wage increases; NJ raised the minimum wage and indexed it to inflation by ballot initiative. These changes take effect at different points in 2014 and 2015. 7
  • 9. The U.S. Remains Slightly Lower Than Other Advanced Countries Even With a $10.10 Minimum Wage Real Minimum Wage in 2016 U.S. Dollars* Australia Luxembourg France Belgium Ireland New Zealand Netherlands Canada United Kingdom Japan Austria United States Israel Slovenia Spain Greece Korea Portugal Turkey Poland Czech Republic Slovak Republic Hungary Chile Estonia Mexico 0 2 4 6 8 10 2016$ Per Hour 12 14 16 18 *Underlying data in 2012 US$, converted to 2016 US$ using CBO projections for consumer price inflation. Source: OECD; CEA calculations. 8
  • 10. Raising the Minimum Wage Would Help Businesses by Increasing Productivity and Reducing Turnover and Absenteeism Some of the key findings from decades of research on the minimum wage: 1. Increases worker productivity. A higher minimum wage would increase the productivity of workers: • Greater motivation and perception of fairness. Workers are motivated directly by feeling they are receiving a fair wage (e.g., Bewley 1999; Mas 2006). Akerlof (1986) argues that higher wages increase employee morale, which raises productivity. Also, workers monitor each other more when they feel that they are receiving good, fair wages, creating a culture of hard work that allows employers to spend less on supervising them (Akerlof 2012). • Improved focus on the job. Higher wages help workers maintain better physical and mental health and could help relieve “decision fatigue” (Mani, et al 2013; Shah et al, 2012), allowing them to be more productive at work. 2. Reduces turnover and saves on recruiting/training costs. Higher wages lead to lower turnover, reducing the amount employers must spend recruiting and training new employees (Dube, Reich, and Naidu 2005; Dube, Lester, and Reich 2013). 3. Reduces absenteeism. When workers are paid higher wages, they are absent from work less often, increasing both their own productivity and that of their coworkers (Allen 1983; Mefford 1986; Pfeifer 2010; Zhang 2013). 9
  • 11. Based on 64 Studies of Minimum Wage Increases, Researchers Find “No Discernable Effect on Employment” Study Finds Reduced Employment Study Finds Increased Employment Studies have shown that minimum wage increases lead to “little or no employment response”:  Comparing 288 pairs of contiguous U.S. counties with minimum wage differentials from 1990 to 2006 finds “no adverse employment effects” (Dube, Lester, and Reich, 2010).  A meta-analysis of the minimum wage research published since 2000 concludes, “The weight of that evidence points to little or no employment response to modest increases in the minimum wage” (Schmitt, 2013).  Researchers have noted that even this distribution of studies is biased because studies (spuriously) finding large positive effects on employment are likely not to be published while studies (spuriously) finding large negative effects on employment are published. 10
  • 12. APPENDIX: Beneficiaries of Increasing the Minimum Wage Characteristics of Minimum Wage Workers and Workers Affected by Increasing the Federal Minimum Wage Sex Male Female 42.1% 57.9% Workers Affected by Increase to $10.10 21.4% 45.0% 55.0% All Workers 100.0% 51.5% 48.5% Family Income Under $35,000 $35k-$75k $75k+ 47.7% 30.2% 22.2% 45.5% 32.1% 22.4% 24.8% 35.0% 40.2% Race/Ethnicity White Black Hispanic Asian Other 52.3% 13.0% 27.6% 4.7% 2.4% 53.3% 14.5% 25.2% 4.8% 2.3% 65.0% 11.2% 16.2% 5.8% 1.8% Minimum Wage Workers Workers Affected by Increase to $10.10 All Workers Teenagers % of All Workers Minimum Wage Workers 4.5% 12.7% 9.0% 12.9% 41.2% 24.2% 16.3% 10.0% 17.4% 44.2% 12.1% 26.6% 7.5% 27.4% 35.1% 3.4% Age Under 20 yrs old Age 20-29 Age 30-39 Age 40-54 Age 55+ 24.2% 35.4% 13.9% 16.0% 10.4% 12.1% 37.0% 16.7% 20.6% 13.6% 3.4% 21.9% 21.7% 33.0% 19.9% Family Structure Married w/ kids Unmarried w/ kids Married w/o kids Unmarried w/o kids Source: Current Population Survey, outgoing rotation groups for December 2012 through November 2013. Minimum Wage Workers earn a wage within 25 cents above or below the federal minimum of $7.25. Affected workers earn a wage between 25 cents below the minimum and $10.10, deflated from 2016 dollars to 2013 dollars using CBO projections. 11 Percentages may not sum to 100% within category due to rounding.