The fight for a $15 per hour minimum wage is the hottest issue among progressive Democrats today. There has been a lot of progress as cities including Seattle and Los Angeles have passed this as their minimum wage, as has the entire state of New York (but only for “fast food” workers, strangely). It would be a big hike from today’s $7.25 per hour, a 106% increase that swamps any previous jump. President Obama, and many Democrats, favor a smaller $12 per hour rate as something of a compromise.
But where did these numbers come from? Why are they important? What effects would a minimum wage rise have on the economy? It’s worth spending some time looking at the postwar history of the minimum wage, from 1947 to 2015, to see where we are today and what it means.
What a “job” used to mean for many.
The minimum wage came into being in 1912 in Massachusetts and was soon adopted by a number of states. It didn’t become a permanent Federal law until 1938, set at $0.25 per hour. The onset of WWII makes the early history of that experience cloudy and most scholars agree that an analysis of the effects on the economy and culture should start about 1947.
If we adjust the minimum wages set by law over the year for inflation into 2015 dollars, we can see that it has drifted considerably in that time as Congress was slow to keep pace with the cost of living. It has never been automatically indexed. It peaked in constant dollars at the equivalent of $11.16 today in 1968, and hit a low of $5.97 in 2007.
The Federal minimum wage, in constant 2015 dollars. Chart from the Federal Reserve of St Louis.
This is not the entire story, however. As noted previously, before 1973 salaries and wages accounted for about 50% of the total product of this nation and have been slipping ever since, to 43% today. That difference is not a small one, amounting to a 16% net difference in pay for the average worker. It’s a shortfall of about one trillion dollars overall if we only had salaries keep pace with productivity gains, maintaining the same relationship they had immediately after the war.
We can adjust the net minimum wage for productivity gains by developing a “Productivity Index”, where the output per worker in 2015 is normalized to 1.00 and every previous year is less. The effect of productivity gains since 1947 shows how large this effect is.
A “productivity index” where 2015 output per worker is normalized to 1.00. Data from the St Louis Federal Reserve.
By dividing the inflation adjusted minimum wage by the productivity in any year, we can scale every previous year to show what an adjusted rate would look like today. The chart demands some annotation:
An inflation and productivity adjusted minimum wage by year. Data from the St Louis Federal reserve, annotations by the author.
Note that prior to about 1981 the net average is about $16.20 per hour. It then falls steadily through the 1980s before settling in to something like a pattern again in 1988. From 1988 until today the average of this productivity adjusted minimum wage is about $8.38 per hour.
Can he make a lot more? Or will his job only be more automated and turned into “self service”?
This naturally brings us back to that roughly trillion dollar shortage in worker’s paychecks when today’s wages are compared to the early 1970s. Currently, about 1/3 of all workers earn less than $15 per hour, and about 40% earn less than the $16.20 that would be the minimum wage today if it kept pace with productivity gains. Exact figures are hard to come by, but with an average wage of $20.18 per hour we can see that the difference between today’s minimum wage and the historical relationship, or indeed any proposal on the table, is a big one.
In fact, it makes up about half of that trillion dollar difference noted if salaries still accounted for half of all output in the US.
So why don’t we just pass a $15 minimum wage, or for that matter $16.20, and be done with it? The effects on the economy are completely unknown because we have never raised the rate that quickly before. The possibility of mass unemployment as workers are replaced with more and more automation remains unknown. It seems unreasonable to say that you can raise the salaries of a third or more of all workers without other effects.
In a time of very cheap money and globalism we can say that the capital is there to invest in automation and to “offshore” jobs easily.
It always takes a little more.
Such proposals would definitely be inflationary, of course, but we are in a period where inflation is low and stagnation is a much greater concern. But would a change this large swamp the economy with far too much money too quickly? We can’t say for sure.
But the greater problem is that there is considerable evidence that there is only so much paid work to be done in a developed economy, as we have noted before. A comparison between nations shows that the most reliable indicator of income inequality is the percent of those over 16 years old in the workforce, which is to say that too many workers chasing too few jobs suppresses wages by simple supply and demand.
That, however, is about to change as Baby Boomers retire in large numbers. That process has started already and will accelerate after 2017.
It may even be possible to make such a rise at least partially pay for itself. As noted before, the overhead per employee now stands at an average of 42% above and beyond pay. That means that a worker making $7.25 per hour costs at least $10.30 per hour. It’s likely much more because health care costs are a fixed dollar amount per employee, meaning that a minimum wage worker may already cost $15 per hour to many business that have to comply with the Affordable Care Act.
How healthy is it?
If government paid a portion or even all of health care costs for business in the form of a credit these costs could come from taxes on profits instead of as what is effectively a tax on labor. The effects of a high minimum wage would be lessened dramatically.
Is it time for a $15 per hour minimum wage? If there is indeed a labor shortage coming the answer may well be yes – if it is raised incrementally over the next five years or more to give everyone time to prepare for it. It almost certainly demands greater skills from workers as some level of automation will certainly come into play, but this may be the nudge that the economy needs to get out of its funk and put social equity back into the economy.
But can we sustain it? There would be temptation to automatically index the minimum wage to both inflation and productivity gains, but this has to be done with caution. If we wind up in a spiral where automation really takes control, productivity will go up at a fast clip, raising the minimum wage more and and increasing the incentive to introduce more automation.
There are many questions about how this might play out, but there are many ways that we can make it work if we are dedicated to it. That is a reasonable policy because it would restore part of the basic social contract that governed the best years of equity and growth in the US economy – a good days’ pay for everyone that puts in a good days’ work. It would move us back to an arrangement where workers and capital split the profits of our economy 50/50, too.
No matter how you look at it, today’s minimum wage is very low. A rise of some kind is necessary and desirable. What we need is leadership that is dedicated to finding ways to make it happen without terrible side effects – and that is definitely possible.
There are many links in this essay to previous arguments and articles from other sources that are vital to understanding the current and historic role of the minimum wage in the relationship between wages and capital in the US. Please follow them if you have any questions.
Barataria - The work of Erik Hare 
Best article on this yet. Excellent blog!
Thanks!
I found this interesting and ironic: http://www.theguardian.com/us-news/2015/jul/29/los-angeles-unions-exempt-15-dollar-minimum-wage
Not being discussed, and needing to be, is the exemption of agricultural workers from the minimum wage. These are among the most exploited of all workers.
It would be interesting to know what proportion of workers making less than $15/hr are in service work that can’t readily be offshored.
Overall, I find this movement encouraging.
Yes, I honestly don’t know what to make of that story. Yeesh.
There are a LOT of details, like the ones you named, which we really need to think about. The ag exemption dates back to 1938, but is the reasoning still valid? I doubt it. I do believe that a lot of the low wage earners are indeed in service work, given how factory jobs still pay pretty well overall.
This is one truly progressive movement I can sink my teeth into, yes. But I also want to say that I do think a compromise to lower the overhead per worker, making this much more affordable for businesses, is still a good idea. We don’t want to distort the market towards automation and we also really want to get this passed.
Great post. Well thought out and informative. Policy makers in Washington (that is, Republicans who think workers are already paid too much and business cannot withstand a higher minimum wage) need to read this post. Well done!
Now tell us why reducing social security disability payments by 19% in 2016 and not linking a 2015 cost of living increase as normally done is not the way to treat disabled Americans. (A 19% decrease in my monthly disability income would take me back more than 15 years to $700 from my current $960). Republicans need to act now to prevent this catastrophe to millions of disabled Americans like myself.
SSDI is another thing altogether, and it’s just ridiculous how that has been allowed to be so mishandled.
But thanks – I’ve been thinking about this for a while now and I feel like I finally have a handle on it.
If one truly wanted to promote employment growth in the US, one of the most productive moves would be to offload the responsibility for health care from employers onto a universal, tax-supported system. I know it is hard to envision that actually happening, given the political clout of the health care industries, but….
ABSOLUTELY! There is no reason for employers to get stuck with that tab. I made a proposal for weaning us off this system in the post. I think it would make a higher minimum wage much more affordable and cause fewer side effects as a result.
Long live the Irish Republican Army!
All due honor to the Catholic working class!
You’re no fun.
wages fell in the 70’s because big corps realized they could just pocket the profit instead of sharing it. they kept wages stagnant even as productivity rose. the solution is to raise wages, take the money directly from profits and salaries of those same ceos. they don’t need 30 million dollars a year. no one does. the world will not fall apart. they will earn half their salary, maybe. less, but they will survive. there should be something set in place to make them bring factory jobs back to the u.s.. that will create long term jobs at good wages. there should also be stipulations that they can’t replace workers with machines. we just don’t need anymore self check outs at the grocery store. unless an entire new industry opens up, people need those jobs. speaking of new industry.. the internet. let’s get that going, find a way to employ a million people doing something. pay them to go explore and bring a gopro with em. who the hell cares. google has money. all of these giant corporations are responsible for this mess and they are the ones who fighting the hardest against it. we need more people to join the fight. it is past time. it took another great depression for people to wake up…
the most important thing we can do as a nation is~~ start eating healthy. when you eat fake processed food you cloud your mind and poison your body. that is what they want. sugar, salt, fat, caffeine, alcohol, nicotine.. all of it.. it has to go. i started eating healthy about 5 years ago and i’ve never been healthier. i can think clearly and faster than ever. i feel like a kid again. i’m an idealist. i’m not a conformist. i think of myself as an actual adult now even though i was 25 when i made my dietary changes.. i wasn’t an adult, i was a perpetual teenager. always making excuses. now i live a life of no excuses.. i take care of mine and i don’t take any crap. i don’t excuse other people.. i tell them to eat healthier, be a responsible adult, and get the hell out of my way if you’re not gonna. sanity must be restored. eat a raw diet of veggies and fruit, fish beans, whatever ya like, as long as it’s in it’s original form.
I won’t argue with you here. If we all take a long deep breath and start doing what makes us happy and healthy we’ll have a new and better economy shortly, because an economy is nothing more than a collection of people’s real values.
You are talking about a New Deal, and I’ve been in favor of this for about 8 years now! So, yes, let’s give people a job rather than an unemployment check.
As for the 70s, it does seem to be when the erosion started – and has continued to this day. That’s also when a much higher percentage of adults started working, up from 58% 1947-1968 and climbing up to 68% by 2000. It’s down to 63% now. I’m convinced there is only so much paid work to do in a developed economy, so more workers only suppresses wages at some point. That’s what I think happened. And I have faith in the future because as Baby Boomers retire we’ll go back to that 58% again shortly.
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Well, if a higher minimum wage was supplemented with a basic income program (probably best done through expanding and extending Social Security and Medicare universally to everyone as a replacement for the means-based “welfare” programs), adjustments to automation would be less severe. Also, there are still lots of jobs that can be created in upgrading public infrastructure, converting to a sustainable “green” economy, so throw in a Livable Wage Job Guarantee to go with that.
The basic point, though, is that fair compensation for work tendered should be the rule, and exploitation through low wages should be totally eliminated.
I agree that a lot has to be thought through. The economic success of the 1950s was based on a family unit with one wage earner, meaning that many people relied on one income. That is still the case, but “family” units are often smaller now – one wage earner per family means we need a lot more jobs. And there is more than one wage earner in most families anyway. The downward pressure on wages has killed us, IMHO. I think that shows in the numbers.
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