Reports from the Economic Front

a blog by Marty Hart-Landsberg

The Minimum Wage and Capitalism

On January 1st, the minimum wage increased in Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont and Washington. These eight states all have laws which require them to automatically increase their respective minimum wages by the rate of inflation. Nevada also indexes its minimum wage but its increase takes place in July.

The state of Washington has the highest state minimum hourly wage at $9.04.  Oregon has the second highest at $8.80.

Eighteen states plus the District of Columbia have minimum wages above the federal minimum wage which remains at $7.25 per hour.  A full-time worker making the federal minimum wage earns just $15,000 a year.

There are those who argue against state laws requiring an inflation adjustment to the minimum wage.  Their most common argument is that such government mandated increases are a threat to business profitability and the health of our capitalist, free-market economy.  This is an interesting argument.  At one time, the conventional wisdom was that capitalism was a means to an end, the end being a better standard of living.  Now it appears that capitalism has become the end itself, and to sustain a healthy capitalism workers will have to make sacrifices.     

Actually, those arguing against increasing the minimum wage are really arguing for the necessity of a declining real wage.  The minimum wage has not kept up with inflation. This is true even in states that currently index their minimum wage.  The reason is that indexing began after years of real wage decline. For example, Oregon’s January 2012 increase to $8.80 from $8.50 still leaves the real inflation-adjusted Oregon minimum wage below what it was in 1976.  In 2011 dollars, Oregon’s 1976 minimum wage was $9.09.

The federal government does not automatically index the federal minimum wage and the chart below highlights the extent of the decline in its real value. The blue line shows the actual or nominal dollar value of the federal minimum wage; increases are the result of a vote by Congress.  The red line shows the real value of the minimum wage in 2010 dollars.  In real terms the federal minimum wage remains considerably below its value in the 1970s.

wage-trend.png

A second common argument against inflation adjusted increases in the minimum wage is that it is just a training wage for young teens and therefore not important to family survival.  This argument misses the mark for several reasons, the most important being that, as the chart below shows, 80% of minimum wage workers in the eight states with mandated increases are over the age of 20, and more than 75% work more than 20 hours per week (just over half work full-time). In fact, according to an Economic Policy Institute study of national data, families with a minimum-wage worker rely on their earnings for nearly half the family income.

 table-on-increase.png

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2 responses to “The Minimum Wage and Capitalism

  1. Sheldon January 1, 2012 at 12:45 pm

    Hi Marty,
    Thanks for your blog. Isn’t there another argument against the minimum wage? That it actually causes unemployment. Maybe it isn’t taken seriously at all by even neoclassical economists, but I hear it occasionally on John Stossel. (Which tells you right there it is probably bullshit).

    Like

  2. Martin Hart-Landsberg January 1, 2012 at 10:20 pm

    Good question. A lot of empirical work has been done by economists attempting to determine the effect of a minimum wage increase on hours worked. Some studies have found a statistically significant but small negative effect, some have found a statistically significant but small positive effect, and others have found no statistically significant effects.

    Even those that found statistically significant small negative effects on employment have generally been positive about minimum wage increases because their estimated gains in total wages outweigh their estimates of lost hours of employment.

    Thus, in 2006, more than 650 economists, including five Nobel laureates, published a statement calling for an increase in the federal minimum wage.

    Like

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