by Jared Bernstein
The minimum wage is back on the agenda. And that’s a good thing.
The New York Times reported Thursday on a proposal by Rep. Jesse Jackson to raise the minimum wage to $10 an hour from its current level of $7.25. As Jackson, an Illinois Democrat, put it:
We’ve bailed out banks, we’ve bailed out corporations, we’ve bailed out Wall Street…Now it’s time to bail out working people who work hard every day and they still only make $7.25. The only way to do that is to raise the minimum wage.
There’s some logic to that, though it’s not so much “bail out” as “bring along.” But before I explain, here’s some background.
The national minimum wage has existed since the 1930s, but it reached its peak of about $9 per hour in today’s dollars in the late 1960s, as you can see in the figure here. It’s not adjusted for inflation, so unless Congress (or state legislatures—18 states have set their own minimums above the federal level) raises the minimum, its buying power declines. During the Reagan years, the minimum went from about $8 to about $6 in 2011 dollars.
How many hourly-paid workers earn the minimum? The Times puts the figure at around 4 million, which doesn’t sound like much in a job market of over 130 million.
But the more relevant number here is how many workers would get a boost if the minimum were raised to $10, as Jackson proposes. The Economic Policy Institute estimates that a similar proposal by Sen. Tom Harkin, an Iowa Democrat, would reach over 19 million workers. And another nine million who make more than $10 per hour would get an indirect boost. That’s because when the minimum wage goes up, employers tend to give a boost to workers right above the new minimum, research finds. So an increase of this magnitude could benefit a significant number of American workers—likely over one in five.
You can imagine why low-wage workers and their advocates like this idea. You can also see why those employers whose labor costs would rise, as well as market fundamentalists who object to the government setting a wage floor, would fight it. (Their claim is that it will hurt low-wage workers by pricing them out of the job market, but a wealth of research has found otherwise (pdf)). Mitt Romney wants to index the minimum wage to inflation—a good idea—but starting at its current level—a very bad idea that would lock in a low, real minimum. Back in 2008, President Obama campaigned on raising the minimum to $9.50 by 2011, but he hasn’t said much about it since.
But beyond the politics, why is it, as I suggest above, a good idea?
The answer has to do with the sharp rise of income inequality, low-wage workers’ lack of bargaining power, and what old-timers like me call “wage contours.”
Wage contours are just norms that set wages in specific types of jobs for specific groups of workers. Less than supply and demand, such norms have been found to be important, particularly at the low end of the pay scale. A hotel maid’s wage, for example, is more likely to be keyed off the minimum wage than off the intersection of supply and demand curves. If that sounds far-fetched, think about it from the other side of the income scale. The compensation package of a CEO of a large bank is not so much a function of classical supply/demand relations as cultural norms—norms which have gotten way out of whack.
Which leads me to inequality. As you’d expect, the decline in the real minimum wage explains part of the wage gap—about a third, according to various studies—between middle- and low-wage workers (more for women, less for men). That’s because low-wage workers tend not to have a lot of bargaining power. Imagine a janitor working for an outside contractor in an investment bank raking in huge profits. Who here thinks that worker is going to get a piece of the action? So raising the minimum wage is one of the simplest and most effective steps we could take to address our inequality problem.
Back in the 1930s, when all these same conditions—high inequality, weak demand, no bargaining power—prevailed, Congress recognized that we needed a wage floor to offset them (hard to imagine, I know, but Congresses used to do useful things like this). Since then, through the wage-setting contours and norms that define the low-wage sector, the living standards of these workers and their families have depended in part on the minimum wage. As it sank, so did they.
These are difficult times for the American economy, and we’re doing better than many of our European counterparts. But somewhere out there in the future, there’s an economic recovery that will eventually take hold. The question is: Will it be one that once again leaves low-wage workers behind?
Raising the minimum wage could help ensure the answer is no. And like I said, that would be a good thing.
Jared Bernstein served from 2009 to 2011 as chief economist to Vice President Joe Biden, and as a member of President Obama’s economic team. He is currently a Senior Fellow at the Center on Budget and Policy Priorities, and an msnbc contributor.
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