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.
Election Economics Topics:
Posted by: adminEcon
Tags: $7.25, Democrats, Fair Labor Standards Act of 1938, floor, jobs, minimum wage, Mitt Romney, President Obama, Republicans, teenage jobs, unemployment
Should we like a higher minimum wage? With the release of 9.6% as the August, 2010 unemployment number, I thought about the minimum wage debate. The teenage unemployment rate is 26.3%.
In 2007, Congress increased a $5.15 minimum wage in three stages. On July 24, 2009, the final 11% raise, from $6.55 to $7.25 was implemented in the 31 states with a lower minimum wage.
If you owned a fast food restaurant and were told that you had to pay workers a higher minimum wage of $7.25 an hour, what would you do? Give everyone raises and pay the increased hourly rate to new hires? Only give raises to current employees but decide not to do the hiring it had planned? Terminate certain positions? Other alternatives? You might want to look at a good discussion here.
The Economic Lesson
Originating in Australia and New Zealand during the 1890s, minimum wage legislation was first passed federally (it had existed in individual states) in the U.S. through the 1938 Fair Labor Standards Act. Believing that employers were paying “substandard wages” and perpetuating sweatshops, Congress sought to ensure a “fair wage”. Their rationale was the need to tilt the balance of power toward workers.
Graphically, economists illustrate the minimum wage through a “floor”. Please imagine for a moment a supply and demand graph. Price is the y-axis and quantity is the x-axis. Thinking of wages, the supply curve represents labor and the demand curve is the business side of the market. The point at which demand and supply meet, called equilibrium, is the wage (the price of labor) determined by the market.
Government, however, can say that it believes the market determined wage is too low. It then mandates a higher wage that can be depicted as a horizontal line placed above equilibrium. Economists call this horizontal line a “floor” because it stops wages from moving lower to their natural market price.
And therein lies the dilemma. A higher wage or more jobs? Floors create surpluses. At the new, higher wage, the number of jobs laborers want is more than the number of jobs businesses are willing and able to offer. So, we have a higher wage but fewer jobs. Perhaps 26.3% fewer jobs for teenagers and other unskilled workers?