Obama/Biden and Romney/Ryan Issues

Election Economics: Assessing the Minimum Wage

Jul 30, 2012 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Government, Labor, Macroeconomic Measurement, Regulation, Thinking Economically, Uncategorized • 167 Views    No Comments

Currently at $7.25, should the federal hourly minimum wage rise to $9.80?

Proposed legislation from House Democrats would increase the minimum wage in three steps, 85 cents a year for 3 years. After that, the amount would move upward with inflation.

Advocates of a higher minimum wage usually focus on the purchasing power of the working poor. Using 1968 as a benchmark, they remind us that the minimum wage then, at $1.60, could purchase 5 gallons of gasoline (34 cents a gallon) and $1.60 in 1968 is the same as $10.55 today.

Opponents are concerned about jobs. Many (but not all) economists believe that when mandated wages go up, job offers go down. They cite higher expenses for businesses and a direct hit to the teenage labor market.

Called a floor, the minimum wage on a graph is drawn as a horizontal line above the point where demand and supply naturally establish the wage. That line crosses the demand curve of available jobs at a lower quantity than the supply curve of available workers. The higher the line, the greater the gap between jobs and workers.

Where do the candidates stand? Again the lines are clearly drawn.  When campaigning in 2008, President Obama supported a $9.50 minimum wage. By contrast, Mitt Romney has said peg the minimum wage to inflation but there is no need to increase it now.

This ABC news story has a great US map showing state by state minimum wages with Washington the highest and Georgia at the bottom. You can check minimum wage history here and then compare it to today’s minimum wage in this CPI inflation calculator. A Chicago Fed paper on the spending impact of a $1 minimum wage increase is here. And finally, at 25 cents (equal to $4.07 buying power now) the first federal minimum wage was mandated in 1938 through the Fair Labor Standards Act.

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