“Can a Family Survive on the U.S. Minimum Wage?” asks the headline of Investopedia’s article. The article leads with: “The federal minimum wage for nonexempt employees in the United States is $7.25 as of 2024. It's meant to be a living wage but this isn’t the case in practice. The hourly rate hasn’t kept up with the cost of living since 1970. The earnings of a minimum wage worker with a family of four fall well below the poverty line.”
The most absurd claim is that the minimum wage is meant to be a living wage. It wasn’t always so.
Franklin D. Roosevelt campaigned on and for a minimum wage after a young girl working in a sewing factory in Massachusetts told him about companies dropping their pay from $11 per week (not per hour) to $4-6 dollars per week. Believing that setting a minimum for government contractors would compel private employers to raise their wages, his efforts initiated the fight about living (and minimum) wages that continues to this day.
The first wage set by the Federal Labor Standards Act in 1938 was 25 cents an hour (adjusted for inflation, about $4.74 in 2023 dollars). In 1967, two years after the minimum wage was expanded to agriculture, schools, nursing homes and restaurants, the minimum wage was $1.00 per hour. Raised to $1.15 in 1968, it had the spending power of $12.50 an hour when adjusted for inflation.
The wage was raised seven times through 1981, then it stalled for nine years. Then from 1990 to 2009, only changed six more times. Since then, it hasn’t budged. The longer the federal minimum wage remains unchanged, the greater distance it is from a living wage. The spending power of the minimum wage is down 30% since its 1968 peak, and the income gap is growing. To complicate matters, 20 states still have their minimum wages at (or below) the federal level. -- Yes, seven of the states have no minimum wage law.
Because the minimum wage can’t be lived on, what is a living wage? Should it replace the minimum wage? Would it be economically sound? According to University of Bern Professor Stephanie Moser, PhD, “a living wage and an approximate income needed to meet a family’s basic needs would enable the working poor to achieve financial independence while maintaining housing and food security. When coupled with lowered expenses for childcare and housing, the living wage might also free up resources for savings, investment, and the purchase of capital assets (e.g., provisions for retirement or home purchases) that build wealth and ensure long-term financial stability and security.”
In short, a living wage is an income amount that allows a working person to build enough resources to purchase a home and retire, not merely subsistence.
There isn’t a clear definition of “living wage” among economists, said Wabash College Economics Professor Joyce Burnette, PhD, but pushing for a wage that covers expenses goes back over 100 years. Going back to the 19th century, people were pushing for a family wage, one that covered a single wage earner – usually a man - who could then provide for children and spouse - usually a woman.
That discussion has moved towards a living wage, which varies from place to place, so it’s tough to establish a set number that applies from Seattle to Crawfordsville. Burnette notes that this is why over half of the states and many cities have increased their minimum wages.
In spite of the efforts of 30 states and many municipalities raising their wages, the minimum wage and the living wage face pushback. What are the objections?
“The original argument against it is that it will cause unemployment,” said Burnette. In the 1980s, the public and politicians debated it so fiercely that economists David Card and Alan Krueger wrote a paper that defied the easy logic that “if you raise the cost of something, then people will buy less of it. If the thing whose cost you raise is a new hire, then businesses will buy fewer new hires” (Timothy Noah, The New Republic 2021). Their research compared unemployment levels at fast-food restaurants in New Jersey, which had defied the declaration that the only good minimum wage was $0, and raised theirs from $4.25 to $5.05.
What Card and Krueger found was that full-time employment increased a bit in New Jersey compared to its neighboring eastern Pennsylvania. While fast-food prices increased relatively, there was no evidence that price hikes in fast-food restaurants where the wage increased were any greater than those where the wage had not gone up.
The findings of Card and Krueger’s paper “changed economic policymaking,” wrote Noah in The New Republic.
Burnette noted that a new idea called monopsony emerged after that data study. Monopsony is where there’s only one buyer for a good or service.
“If you’re the only purchaser of something then you’re technically a monopsony,” said Burnette. For instance, what if your local hospital and doctors’ offices are all run by one company like Franciscan Health or IU Health? In that case, all the health workers would be “bought” - that is their wages paid - by one company. That company would have wage-setting power.
If they have a dominant say in that type of hiring, they have a certain amount of power over their employee’s wages. Though people can leave a field or a job if they are not happy, it takes a lot of work to get a different job, said Burnette. People might not have the right information or feel prepared to seek another job. It gives the employer a little more power over their current employees.
The good news is that “all markets are somewhere in between. That’s true of labor markets too,” Burnette said.
David Neumark, a visiting scholar at the Federal Reserve Bank of San Francisco, evaluated multiple studies from decades leading up to, through and after the 2008 Recession and found that states that raised minimum wages saw a modest cut in unemployment - usually among teens and very low-skilled workers - but the wage gains overall boosted household income and reduced poverty and inequality.
The Congressional Budget Office found that an increase of the national minimum wage, which is far below a living wage, would raise earnings for 3.5 million workers and “have virtually no effect on employment.” It also wouldn’t raise the standard of living for people in poverty. Raising the minimum to $12 per hour would help 11 million people but could negatively impact employment for 300,000 lowest-income workers. It would likely bring 400,000 out of poverty. Upping the wage to $15 per hour would benefit 27 million people but may hurt 1.3 million jobs. Equally, it could raise another 1.3 million out of poverty.
Another objection to raising wages is that it might inflate the cost of goods and services. But employment costs are only part of the goods and services in low-income jobs like food and hospitality.
Burnette notes that the cost of producing something like a fast-food burger is split into different proportions. A small proportion is the wages of the person working the counter or fryer at the restaurant. There are the wages of the farmer raising the beef, cheese, grain for the buns, the agricultural workers picking the lettuce, tomatoes and onions, and the factory workers making pickles, buns and condiments.
In campaigns by the Fair Food Program to raise the produce pickers’ wages by a couple of dollars an hour during the early 1990s, organizers found it would only increase the cost of tomatoes by a penny a pound, a fraction of a cent for a fast-food burger’s measly slice of tomato.
Would raising wages to make the living wage reasonable lead to inflation? That’s not what causes inflation, said John Cochrane, senior fellow at Stanford’s Hoover Institute and writer of “The Grumpy Economist” blog, speaking at Purdue. If the economy continues to grow, it can sustain higher wages.
The call for a living wage has the power to lift millions out of poverty. One wonders if it isn’t time for a new approach to wages.