Minimum wage in the United States

History

In 1912, Massachusetts organized a commission to recommend non-compulsory minimum wages for women and children. Within eight years, at least thirteen U.S. states and the District of Columbia would pass minimum wage laws. The Lochner era United States Supreme Court consistently invalidated compulsory minimum wage laws. The laws were considered unconstitutional for interfering with the ability of employers to freely negotiate appropriate wage contracts with employees.

The first attempt at establishing a national minimum wage came in 1933, when a $0.25 per hour standard was set as part of the National Industrial Recovery Act. However, in the 1935 court case Schechter Poultry Corp. v. United States (295 U.S. 495), the United States Supreme Court declared the act unconstitutional, and the minimum wage was abolished. The minimum wage was re-established in the United States in 1938 (pursuant to the Fair Labor Standards Act), once again at $0.25 per hour ($4.23 in 2015 dollars). In United States v. Darby Lumber Co. (1941), the Supreme Court upheld the Fair Labor Standards Act, holding that Congress had the power under the Commerce Clause to regulate employment conditions.

Recent legislation

Since it was last reset on July 24, 2009, the federal minimum wage in the United States has been $7.25 per hour. Some U.S. territories (such as American Samoa) are exempt. Some types of labor are also exempt: employers may pay tipped labor a minimum of $2.13 per hour, as long as the hour wage plus tip income equals at least the minimum wage. Persons under the age of 20 may be paid $4.25 an hour for the first 90 calendar days of employment (sometimes known as a youth, teen, or training wage) unless a higher state minimum exists. The July 24, 2009, increase was the last of three steps of the Fair Minimum Wage Act of 2007. The wage increase was signed into law on May 25, 2007, as a rider to the U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007. The bill also contained almost $5 billion in tax cuts for small businesses.and they raised the minimum wage to 3,000,000.90

Voters in six states (Arizona, Colorado, Missouri, Montana, Nevada, and Ohio) in 2006 approved statewide increases in the state minimum wage. The amounts of these increases ranged from $1 to $1.70 per hour and all increases were designed to annually index to inflation. Some politicians in the United States have advocated linking the minimum wage to the Consumer Price Index, thereby increasing the wage automatically each year based on increases to the Consumer Price Index. So far, Ohio, Oregon, Missouri, Vermont and Washington have linked their minimum wages to the consumer price index. Minimum wage indexing also takes place each year in Florida, San Francisco, California, and Santa Fe, New Mexico.

In April 2014, the U.S. Senate debated the Minimum Wage Fairness Act (S. 1737; 113th Congress). The bill would amend the Fair Labor Standards Act of 1938 (FLSA) to increase the federal minimum wage for employees to $10.10 per hour over the course of a two-year period. The bill was strongly supported by President Barack Obama and many of the Democratic Senators, but strongly opposed by Republicans in the Senate and House. Later in the year, voters in the Republican-controlled states of Alaska, Arkansas, Nebraska and South Dakota considered ballot initiatives to raise the minimum wage above the national rate of $7.25 per hour. In all four states the initiatives were successful. The results provide further evidence that raising minimum pay has support across party lines.

Local ordinances

On June 2, 2014, the City Council of Seattle, Washington passed a local ordinance to increase the minimum wage of the city to $15.00 per hour, giving the city the highest minimum wage in the United States, which will be phased in over seven years, to be fully implemented by 2021. A growing number of California cities have enacted local minimum wage ordinances, including Los Angeles, San Francisco, Oakland, Berkeley, Emeryville, Mountain View, Richmond, and San Jose.

In September 2014, the Los Angeles City Council approved a minimum salary for hotel workers of $15.37 per hour. In April 2016, The Los Angeles Times reported that there is an exemption for unionised workers, and interviewed longtime workers at unionised Sheraton Universal who make $10.00 per hour, whereas non-union employees at a non-union Hilton a few feet away make at least the $15.37 mandated by law for non-unionised employees. Similar exemptions have been adopted in San Francisco, San Jose, Oakland, and Santa Monica.

On August 18, 2015, the El Cerrito City Council directed city staff to draft a local minimum wage ordinance based on a template provided by a coalition for a county-wide minimum wage effort. The details are not final, but Council discussed an initial increase of roughly 28–36% ($11.52 – $12.25 or more) by January 1, 2016, with annual increases that will result in a $15.00 hourly wage rate by 2018–2020. Council did not direct staff to create small business exemptions (or any other exemptions), but a slower phase-in rate may be considered for employees of small businesses. The city will have outreach for residents and business owners to discuss the details of the proposed ordinance. Staff hopes to present a draft for Council's approval as early as October or November 2015.

Union exemptions

As of December 2014, unions were exempt from recent minimum wage increases in Chicago, Illinois, SeaTac, Washington, and Milwaukee County, Wisconsin, as well as the California cities of Los Angeles, San Francisco, Long Beach, San Jose, Richmond, and Oakland.

Trends in purchasing power

Since its inception the purchasing power of the minimum wage has fluctuated. The minimum wage had its highest purchasing power in 1968, when it was $1.60 per hour ($10.88 in 2014 dollars). From January 1981 to April 1990, the minimum wage was frozen at $3.35 per hour, then a record-setting minimum wage freeze. From September 1, 1997 through July 23, 2007, the federal minimum wage remained constant at $5.15 per hour, breaking the old record. From the United States Department of Labor. Employment Standards Administration. Wage and Hour Division, the source page has a clickable US map with current and projected state-by-state minimum wage rates for each state. Some government entities, such as counties and cities, observe minimum wages that are higher than the state as a whole. One notable example of this is Santa Fe, New Mexico, whose $9.50 per hour minimum wage was the highest in the nation, until San Francisco increased its minimum wage to $9.79 in 2009. Another device to increase wages, living wage ordinances, generally apply only to businesses that are under contract to the local government itself.

Since 1984, the purchasing power of the federal minimum wage has decreased. Measured in real terms (adjusted for inflation) using 1984 dollars, the real minimum wage was $3.35 in 1984, $2.90 in 1995, $2.74 in 2005, and $3.23 in 2013. If the minimum wage had been raised to $10.00 in 2013, that would have equated to $4.46 in 1984 dollars.

Economic effects

The economic effects of raising the minimum wage are controversial. Adjusting the minimum wage may affect current and future levels of employment, prices of goods and services, economic growth, income inequality and poverty. The interconnection of price levels, central bank policy, wage agreements, and total aggregate demand creates a situation in which the conclusions drawn from macroeconomic analysis are highly influenced by the underlying assumptions of the interpreter.

Employment and job creation

Neoclassical economics argues that raising the price of something results in a lower quantity demanded, in this case fewer workers. Conceptually, if an employer does not believe a worker generates value equal to or in excess of the minimum wage, that worker will not be hired or retained. Empirical work in the 1990s contradicted this basic model. In a landmark study in 1994, economists David Card and Alan Krueger compared the effect on employment in 410 restaurants in New Jersey and eastern Pennsylvania following an increase in the New Jersey minimum wage from $4.25 to $5.05 in April 1992. The study found "no indication that the rise in the minimum wage reduced employment." However, a 1995 study re-analyzed the evidence from this experiment using payroll data and found that this data suggests that the increase in New Jersey's minimum wage resulted in a 4.6% decrease in employment in that state.

In February 2014, the CBO reported the theoretical effects of a federal minimum wage increase under two scenarios, an increase to $10.10 with indexing for inflation thereafter and an increase to $9.00 with no indexing:

A 2013 Center for Economic and Policy Research (CEPR) review of multiple studies since 2000 indicated that there was "little or no employment response to modest increases in the minimum wage." The study indicated 11 reasons for this finding, the most important including: "reductions in labor turnover; improvements in organizational efficiency; reductions in wages of higher earners ('wage compression'); and small price increases." Another CEPR study in 2014 found that job creation within the United States is faster within states that raised their minimum wage. In 2014, the state with the highest minimum wage in the nation, Washington, exceeded the national average for job growth in the United States.

One study concluded that a 10% increase in the minimum wage lowers low-skill employment by 2–4% and total restaurant employment by 1–3%. Some argue that an increasing minimum wage might reduce youth employment (since these workers are likely to have fewer skills than older workers). Overall, there is no consensus among economists about the effects of minimum wages on youth employment. The Economist wrote in December 2013: "A minimum wage, providing it is not set too high, could thus boost pay with no ill effects on jobs...Some studies find no harm to employment from federal or state minimum wages, others see a small one, but none finds any serious damage."

Prices

Conceptually, raising the minimum wage increases the cost of labor, all other things being equal. Employers may accept lower profits or raise their prices or both. If their prices increase, consumers may demand a lesser quantity of the product, substitute other products or switch to imported products. Marginal producers (those who are barely profitable enough to survive) may be forced out of business if they cannot raise their prices sufficiently to offset the higher cost of labor. Whether the increased income of the workers benefiting from the minimum wage increase can offset these effects is debatable. Some economic research has shown that restaurant prices rise in response to minimum wage increases.

Crime

A March 2017 White House report argued that higher hourly wage led to less crime. The report by The Council of Economic Advisers claimed that "raising the minimum wage reduces crime by 3 to 5 percent." In a 1987 article, Hashimoto argued that raising the minimum wage increases the levels of property crimes in areas affected by the minimum wage after the increase. By decreasing employment in poor communities, total legal trade and production is curtailed. The report which is now twenty-years old, also claimed that in order to compensate for the decrease in legal avenues for production and consumption, poor communities increasingly then turn to illegal trade and activity.

Economic growth

Whether growth (GDP, a measure of both income and production) increases or decreases depends significantly on whether the income shifted from owners to workers results in an overall higher level of spending. The tendency of a consumer to spend their next dollar is referred to as the marginal propensity to consume or MPC. The transfer of income from higher income owners (who tend to save more, meaning a lower MPC) to lower income workers (who tend to save less, with a higher MPC) can actually lead to an increase in total consumption and higher demand for goods, leading to increased employment.

The CBO reported in February 2014 that income (GDP) overall would be marginally higher after raising the minimum wage, indicating a small net positive increase in growth. Raising the minimum wage to $10.10 and indexing it to inflation would result in a net $2 billion increase in income during the second half of 2016, while raising it to $9.00 and not indexing it would result in a net $1 billion increase in income.

Income inequality

An increase in the minimum wage is a form of redistribution from higher-income persons (business owners or "capital") to lower income persons (workers or "labor") and therefore should reduce income inequality. The CBO estimated in February 2014 that raising the minimum wage under either scenario described above would improve income inequality. Families with income more than 6 times the poverty threshold would see their incomes fall (due in part to their business profits declining with higher employee costs), while families with incomes below that threshold would rise.

Poverty

CBO estimated in February 2014 that raising the minimum wage would reduce the number of persons below the poverty income threshold by 900,000 under the $10.10 option versus 300,000 under the $9.00 option.

Federal budget deficit

The CBO reported in February 2014 that "[T]he net effect on the federal budget of raising the minimum wage would probably be a small decrease in budget deficits for several years but a small increase in budget deficits thereafter. It is unclear whether the effect for the coming decade as a whole would be a small increase or a small decrease in budget deficits." On the cost side, the report cited higher wages paid by the government to some of its employees along with higher costs for certain procured goods and services. This might be offset by fewer government benefits paid, as some workers with higher incomes would receive fewer government transfer payments. On the revenue side, some would pay higher taxes and others less.

Quality of jobs

Minimum wage jobs rarely include health insurance coverage, although that is changing in some parts of the United States where the cost of living is high, such as California or Massachusetts.

Economists

In 2014, over 600 economists signed a letter in support of a $10.10 minimum wage increase with research suggesting that a minimum-wage increase could have a small stimulative effect on the economy as low-wage workers spend their additional earnings, raising demand and job growth. Also, seven recipients of the Nobel Prize in Economic Sciences were among 75 economists endorsing an increase in the minimum wage for U.S. workers and said "the weight" of economic research shows higher pay doesn’t lead to fewer jobs.

According to a February 2013 survey of the University of Chicago IGM Forum, which includes approximately 40 economists:

According to a paper written in 2000 by Fuller and Geide-Stevenson, 73.5% (27.9% of which agreed with provisos) of American economists agreed that a minimum wage increases unemployment among unskilled and young workers, while 26.5% disagreed with this statement.

Economist Paul Krugman advocated raising the minimum wage moderately in 2013, citing several reasons, including:

Politicians

Former President Bill Clinton advocated raising the minimum wage in 2014: "I think we ought to raise the minimum wage because it doesn’t just raise wages for the three or four million people who are directly affected by it, it bumps the wage structure everywhere...The estimates are that 35 million Americans would get a pay raise if the federal minimum wage was raised...If you [raise the minimum wage] in a phased way, it always creates jobs. Why? Because people who make the minimum wage or near it are struggling to get by, they spend every penny they make, they turn it over in the economy, they create jobs, they create opportunity, and they take better care of their children. It’s just the right thing to do, but it’s also very good economics."

Polls

The Pew Center reported in January 2014 that 73% of Americans supported raising the minimum wage from $7.25 to $10.10 per hour. By party, 53% of Republicans and 90% of Democrats favored this action.

A Lake Research Partners poll in February 2012 included the following findings:

List of minimum wage levels by jurisdiction

This is a list of the minimum wages (per hour) in each state and territory of the United States, for jobs covered by federal minimum wage laws. If the job is not subject to the federal Fair Labor Standards Act, then state, city, or other local laws may determine the minimum wage. A common exemption to the federal minimum wage is a company having revenue of less than $500,000 per year while not engaging in any interstate commerce.

Under the federal law, workers who receive a portion of their salary from tips, such as waitstaff, are required only to have their total compensation, including tips, meet the minimum wage. Therefore, often, their hourly wage, before tips, is less than the minimum wage. Seven states, and Guam, do not allow for a tip credit. Additional exemptions to the minimum wage include many seasonal employees, student employees, and certain disabled employees as specified by the FLSA.

In addition, some counties and cities within states may observe a higher minimum wage than the rest of the state in which they are located; sometimes this higher wage will apply only to businesses that are under contract to the local government itself, while in other cases the higher minimum will be enforced across the board.

Jobs affected by the minimum wage

The jobs that are most likely to be directly affected by the minimum wage are the ones that pay a wage close to the minimum.

According to the May 2006 National Occupational Employment and Wage Estimates, the four lowest-paid occupational sectors in May 2006 (when the federal minimum wage was $5.15 per hour) were the following:

Two years later, in May 2008, when the federal minimum wage was $5.85 per hour and was about to increase to $6.55 per hour in July 2008, these same sectors were still the lowest-paying, but their situation (according to Bureau of Labor Statistics data) was:

In 2006, workers in the following 13 individual occupations received, on average, a median hourly wage of less than $8.00 per hour:

In 2008, only two occupations paid a median wage less than $8.00 per hour:

According to the May 2009 National Occupational Employment and Wage Estimates, the lowest-paid occupational sectors in May 2009 (when the federal minimum wage was $7.25 per hour) were the following: