What is a minimum wage?
A minimum wage, in general, is a law that sets the lowest possible amount that work can pay. In the United States, 130 million workers are covered by the Fair Labor Standards Act, the 1938 law that established a national minimum wage.
It has stood at $7.25 an hour since 2009. The District of Columbia and 21 states have a minimum wage higher than the federal one.
Minimum wage increases are a politically popular means of helping low-income families that meet with fierce resistance from employers of low-skilled workers. The constant presence of minimum wage hikes on the political agenda has created a very extensive empirical economics literature that lets us say a great deal about the impact of small increases in incomes and employment.
Who earns the minimum wage?
3.6 million Americans earn at or below the federal minimum wage, according to an annual report from the Bureau of Labor Statistics. That's 4.7 percent of all hourly workers.
Demographically speaking, minimum-wage workers tend to be younger than the average American with a job. The median age of a minimum-wage worker in 2012, according to data from the Bureau of Labor Statistics, was 24. Take a look at this chart, which breaks down the 3.6 million into bins from age 16 to 69:
Or look at it in a slightly different way: what percentage of workers in a certain age group are minimum-wage workers? 21.1 percent of workers age 16 to 19 earn the minimum wage or below, whereas just 1.6 percent of workers age 55 to 59 do.
Women are also more likely to be earning the minimum wage than men. 2.3 million out of the 3.6 million Americans earning the minimum are women, or 6.0 percent of all female hourly workers versus 3.4 percent of all male hourly workers.
Minimum-wage workers roughly match the United States in terms of racial composition, though black and Hispanic Americans are slightly overrepresented. 4.7 percent of non-Hispanic white hourly workers earn the minimum wage, as compared to 5.3 percent of black hourly workers, 3.4 percent of Asian hourly workers, and 5.0 percent of Hispanic hourly workers.
The demography of minimum-wage workers has changed over time, skewing older and more educated since 1979, according to John Schmitt and Janelle Jones of the left-leaning Center for Economic and Policy Research. The share of minimum-wage workers who are teenagers fell from 26 percent then to 12 percent, for example, and the share with less than a high school education dropped from 40 percent to 20 percent.
What jobs pay minimum wage?
One occupation dominates the field: food preparation and service, which employs 43.8 percent of all minimum-wage workers. Another 15.4 percent work in sales — think retail associates at a Walmart. 7.5 percent work in personal care, such as barbers, child-care workers, and home-care aides for the elderly and disabled. Transportation, building maintenance, and office support each employ another 6.0 percent of minimum-wage workers.
Minimum-wage workers also tend to be in part-time positions rather than full-time ones. ("Part-time" is defined as less than 35 hours a week.) 64.4 percent of minimum-wage jobs were part-time and 35.5 were full-time, as compared to 27.1 percent and 72.7 percent for part- and full-time among all workers. A job is roughly five times more likely to pay minimum wage if it is part-time rather than full-time.
How has the minimum wage changed over time?
The first federal minimum wage was set on October 24, 1938, according to a table from the Department of Labor, at $0.25 an hour. Congress has changed the minimum wage 28 times since then, though increases have become both larger and less frequent since the 1970s.
The last increase took effect on July 24, 2009, following a 2007 law that raised the minimum wage in three steps from $5.15 to its current level of $7.25.
Congress sets the minimum wage in nominal terms — that is, in the actual dollars and cents you are paid per hour. Inflation gradually reduces the purchasing power of the dollar, so the inflation-adjusted (or real) value of minimum wage declines over time.
Is the minimum wage going to go up?
Probably not this year. US Senator Tom Harkin and Representative George Miller, both retiring this year, supported a high-profile effort to raise the minimum wage to $10.10 an hour, which won the support of President Barack Obama. Obama has previously supported plans to raise the minimum wage to $9 an hour in his 2013 State of the Union address and to $9.50 as a presidential candidate in 2008. Democrats say they intend to push for minimum wage increases in the 2014 election.
Public opinion polls show strong support of increases in the minimum wage. About 70 percent of Americans, a wide variety of polls suggest, currently favor a hike. The polls also show that Democrats are most strongly in favor of the increase, whereas Republicans are split in half.
Congressional Republicans generally oppose minimum wage increases. The National Restaurant Association is also a significant opponent of increases, as the single most common occupation of minimum-wage workers is food service and preparation.
Action in Congress on the minimum wage is currently stalled. There is little support for an increase in the House of Representatives, where Republicans unanimously voted down a bill in 2013. The Senate failed to move a bill after a vote on April 30, 2014, on a minimum wage hike. The bill received 54 votes to 42 votes, but it needed 60 votes to overcome a filibuster.
Where did the minimum wage come from?
New Zealand was the first country to establish a national minimum wage in 1894, followed by Australia two years later. (See David Neumark and William Wascher's book on minimum wages for a full history.) In the United States, the history of the minimum wage is one of gradual expansion and of Supreme Court intervention.
Several US states established minimum wages in the 1910s, mostly as Progressive "protective laws" for women. Amid the Lochner era, the US Supreme Court found state minimum wages unconstitutional in 1923 case Adkins v. Children's Hospital as a violation of liberty of contract.
The US federal government first tried to establish a national minimum wage in 1933 of $0.25 an hour as part of the National Industrial Recovery Act. The Supreme Court, however, struck down the wage law in the 1935 decision Schechter v. US.
Nevertheless, states continued to try to pass minimum wages — and in 1937, the Supreme Court reversed course in the decision West Coast Hotel v. Parrish, upholding Washington's minimum wage and ending the Lochner era. The US reestablished its national minimum wage at $0.25 an hour a year later. And the Supreme Court finally recognized its constitutionality in the 1941 decision United States v. Darby Lumber Co. The US has had a minimum wage ever since.
Why do some states and cities have a higher minimum wage?
US state and local governments are allowed to set minimum wages above the federal level, which effectively functions as a "minimum minimum wage." 21 states have minimum wages above the federal minimum, as shown in the map below:
States that do not have minimum wage laws, or those with rates below the federal, must follow the federal minimum wage. Of the states in green with elevated minimum wages, Washington has the highest at $9.32 an hour as of January 1, 2014. A detailed table of state minimum wages is available here from the National Conference of State Legislatures.
The city with the highest minimum wage for all workers is SeaTac, Washington, where voters approved a $15-an-hour minimum wage in 2013. The much larger city of Seattle is also moving toward a $15-an-hour minimum wage, but it will be phased in over several years.
Is it possible to earn less than the minimum wage?
Confusingly, yes. Workers can earn below the minimum wage in specific cases. But in most, the minimum wage is really the minimum. If you're an hourly worker who is paid less than the minimum wage without special clearance, you should talk to the Wages and Hours Division of the Department of Labor.
What workers can be paid less than the minimum wage? The most common exception is for tipped employees, such as waiters and bartenders. Employers may pay them just $2.13 an hour, called the "tipped minimum wage," if they expect employees to make up the difference in tips. That difference, $5.12 an hour, is called the maximum "tip credit." A 2009 report by the National Employment Law Project, however, found that employers routinely overestimate worker tips.
Millions of workers are also not covered by the minimum wage. If a business has an annual revenue less than $500,000, then its employees do not receive minimum-wage protections. Those who do not work at hourly wages, such as independent contractors, also do not qualify. Farmworkers at small farms, fishermen, amusement-park workers, newspaper delivery boys, babysitters and a few other classes of workers have special exemptions from the minimum wage.
Younger workers and workers with disabilities also may qualify for reduced minimum wages. Employers can pay teenagers just $4.25 an hour for the first 90 days of employment. Full-time students and students in vocational programs also have their minimums reduced 15 and 25 percent. Workers with disabilities can be paid any amount "commensurate" with their productivity — though a recent investigation by the New York Times finds this exemption is abused.
What do other countries do about the minimum wage?
Almost every country in the world has some form of minimum wage. Among rich countries the big divide is between countries like the United States and France that have a statutory minimum wage and countries like Canada and Sweden (and until this year Germany) where minimum wage rates are hashed out as part of the collective bargaining process.
Australia has the world's highest minimum wage at $16 an hour, and European nations like France, Belgium, Ireland and the Netherlands are a bit behind, with minimum wages in the $11 to $10 range. Canada has a minimum wage of $9.95 an hour.
Does the minimum wage cause unemployment?
There is considerable disagreement, but the consensus among economists is that small increases in the minimum wage have small if any negative effects on employment.
Of course, a very simple theoretical account of supply and demand says that if you raise the price of labor you'll reduce the quantity employers purchase. So it's a surprising fact that many economists have stopped worrying about large increases in unemployment from minimum-wage hikes.
The first major empirical paper taking issue with the simple supply-demand acount arrived back in 1993, when two top labor economists, David Card and Alan Krueger, decided to do a case study of what happened to employment in fast-food restaurants along the New Jersey-Pennsylvania border when New Jersey hiked the minimum wage but Pennsylvania did not. The short answer: Nothing happened. Despite the higher minimum wage in New Jersey, New Jersey's fast-food restaurants did not lay off workers.
Card and Krueger's study sparked hundreds of follow-up studies, scouring the US and the globe for employment effects of minimum wages. For instance, an important 2010 paper by economists Arindrajit Dube, T. William Lester, and Michael Reich took counties that abutted each other but were in different states and looked at employment when one state chose to raise minimum wage while another did not. Dube, Lester, and Reich also found no employment effect.
Researchers do regularly detect small effects on employment, however. The research teams of David Neumark and William Wascher and Richard Burkhauser and Joseph Sabia both have well-known papers showing a reduction in employment. Another new line of research comes from economists Jonathan Meer and Jeremy West, who find that higher minimum wages slow the rate of hiring for new businesses. A 10-percent increase in the minimum wage, Meer and West find, slows job growth by a quarter.
One useful meta-analysis of all these studies comes from economist Hristos Doucouliagos, who showed that precise studies cluster close to zero impact on employment with a majority showing a very small decline.
How is it possible to increase wages without reducing employment?
John Schmitt, an economist at the Center for Economic and Policy Research, has a useful summary of 11 different potential explanations. Schmitt concludes that four are most important:
- Turnover. A higher minimum wage makes working at the minimum wage more attractive. That makes it easier for employers to hire and retain workers, reducing turnover in employment, which is usually high in low-wage industries. The reduction in the cost of turnover offsets the increase in the cost in wages. Underlying this view are the economics ideas of "monopsony" and "labor-market frictions" — that is, that the labor market isn't perfectly competitive, and employers have some power to set wages. A higher minimum wage forces employers to raise wages rather than tolerate vacancies.
- Efficiency. Employers respond to a higher minimum wage by raising expectations for their workers' productivity. Though the wage may have risen in dollar-per-hour terms, the business may squeeze more work out to compensate. A related idea is that of the "efficiency wage" — that is, employees themselves may respond positively to a higher wage by more work effort.
- Wage compression. Employers of minimum-wage workers usually have a defined pay scale for all employees. When the minimum wage rises, employers respond by holding down wages for workers higher up the pay scale to keep labor costs down. The busboys get a raise this year, in essence, because the maître d' didn't.
- Prices. When labor costs rise, employers have three general options. They can pay the costs out of their own profits. They can cut costs in other areas. Or they can just pass on the higher costs to their customers in the form of higher prices. When the minimum wage rises a dollar, so might the price of your haircut.
Would raising the minimum wage help the poor?
Probably. Of the 54 published estimates on the relationship between the minimum wage and poverty, 48 find that increases in the minimum wage reduce poverty. The average effect is that a 10 percent increase in the minimum wage would reduce the poverty rate by 1.5 percent.
The latest and most complete treatment of the issue comes from economist Arindrajit Dube, who finds that poverty rates fall between 1.2 and 3.7 percent for a 10 percent increase in the minimum wage.
Another study by economists Richard Burkhauser and Joseph Sabia, however, find no evidence that increases in minimum wages between 2003 and 2007 reduced poverty. And research by David Neumark and William Wascher argues that minimum-wage hikes have opposing effects on poverty: lifting some out of poverty while driving others into it.
Who loses from a higher minimum wage?
The people who end up paying higher minimum wages, of course. Businesses who employ minimum-wage workers appear to pay for the increase in the minimum wage out of their profits, according to a trio of economists who studied the introduction of the minimum wage in the United Kingdom.
Customers of minimum-wage businesses may also bear some of the cost of increases if the businesses raise prices to compensate for higher wages. Last but by no means least, to the extent that minimum wage hikes cost jobs some potentially employed people lose out.
Can I survive on the minimum wage?
Judge for yourself! The New York Times built a simulator that allows you to enter in expenses for housing, food, and so on — and you can see whether you could even make a livable budget at $7.25 an hour.
Most minimum-wage earners, however, supplement their income with government aid — including 52 percent of fast-food workers, according to a study by Sylvia Allegretto and a team of other economists. The cost of this public assistance to fast-food workers, they found, totaled $7 billion a year.
How would increasing the minimum wage affect this? A new study by economists Michael Reich and Rachel West for the left-leaning Center for American Progress finds that a 10 percent increase in the minimum wage would reduce enrollment in the food-stamp program by about three percent and reduce its costs by about two percent. A higher minimum wage means workers earn more, making them no longer eligible for government money.
Why not set the minimum wage high enough to make everyone rich?
It almost certainly wouldn't work. It's important to understand what research does and doesn't say about the minimum wage. It says increasing the minimum wage slightly — say, to $9 or $10 — would have at most modest effects on employment. Since governments never enact extremely large minimum wage increases, there are no empirical studies of them. Even the labor economists who believe the former think that at some point minimum wages would create unemployment.
But let's suppose that a government did pass a crazy-high minimum wage. What would happen? Some combination of unemployment and inflation. If workers cost far more than they're worth, businesses won't employ them. The only way such a large increase could work is if prices rose so much that it wiped out all of the inflation-adjusted gains of the minimum-wage hike. A minimum wage simply can't overcome the fact that workers earn low wages because what they produce isn't that valuable.
Can raising the minimum wage stimulate the economy?
That's unclear. Economists like Christina D. Romer, the former chair of the Council of Economic Advisers, seem doubtful.
The basic argument is that since the poor consume a larger fraction of their income than the rich, a higher minimum wage results in more consumption. Doug Hall and David Cooper of the Economic Policy Institute find a $40 billion stimulus effect from hiking the minimum wage from $7.25 to $9.80.
Economists Daniel Aaronson, Sumit Agarwal, and Eric French of the Federal Reserve Bank of Chicago find mixed effects on consumption. A $1 increase in the minimum wage leads to $700 dollars in additional consumption per quarter. That's far more than would be supported by the actual minimum wage — so the increase in consumption proves temporary, and poor households end up with increases in debt of about $440 per quarter.
What do economists think about the minimum wage?
A survey of economists by the Initiative on Global Markets at the University of Chicago's Booth School of Business found they supported a minimum-wage increase.
They weren't sure, however, whether increases would create unemployment. Most said that, on balance, the benefits exceeded the costs.
Why do economists disagree about the minimum wage?
The simple answer is that the effects of the minimum wage are particularly hard to measure. That's for two reasons. It's hard to control for all of the other economic variables affecting wages, and historically, most changes in the minimum wage have been small.
Economics doesn't get to have clean, controlled experiments. That's forced researchers to come up with innovative ways to test the minimum wage. Many rely on "natural experiments." The problem is that, even with these plans, it remains hard to control for all outside influences so that any measurement is just of the minimum wage's impact.
To put it differently, estimating the minimum wage's effect on employment relies on constructing a counterfactual — that is, employment had the minimum wage not changed. Your estimate is only as good as your counterfactual — which can never be certain.
Another problem is that most changes in the minimum wage are small, and it's hard to distinguish a slight signal amid the noise from no signal.
Are there other ways to boost low-wage workers’ incomes?
One option is simply giving low-wage workers more money. The main way the US government does this already is with the earned income tax credit (EITC), which gives a maximum of $6,143 to large families with working parents making around $20,000. This graph from the Tax Policy Center shows how it works:
President Barack Obama proposed expanding the EITC to the childless in his 2015 budget, who currently receive substantially smaller benefits. Republicans, however, frequently pose EITC increases as a rival policy option to the minimum wage.
Nothing makes the earned income tax credit and the minimum wage alternatives. Government could do both at the same time. Economists David Lee and Emmanuel Saez have argued, in fact, that the two policies are complementary — in other words, the minimum wage and the EITC are better together than separately. That's because the tax credit tends to depress pre-tax wages, even though it boosts after-tax wages, which reduces the boost to low-wage workers' incomes. A higher minimum wage prevents pre-tax wages from falling in response to a more generous EITC.
And there is a universe of other policy options to indirectly boost low-wage workers' incomes, including "pre-distribution" policies and policies to push the economy towards full employment.
What else should I read about the minimum wage?
David Neumark and William Wascher's book Minimum Wages is the best-known history of minimum wages. For more history, check out A Measure of Fairness by Robert Pollin, Mark Brenner, Stephanie Luce, and Jeanette Wicks-Lim on the movement to create living wages and raise the minimum wage.
David Card and Alan Krueger wrote a book outlining their conclusions about the minimum wage in Myth and Measurement.
Barbara Ehrenreich published the book Nickeled and Dimed in 2001, which detailed her experience living as a low-wage worker.
Here's a list of some key economists to follow on minimum-wage issues, with their most important papers:
- David Card and Alan Krueger: "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania."
- Alan Krueger and Lawrence Katz: "The Effect of the Minimum Wage on the Fast-Food Industry."
- Arindrajit Dube and Michael Reich: "Minimum wage effects across state borders: Estimates using contiguous counties."
- Arindrajit Dube: "Minimum Wages and the Distribution of Family Incomes." "
- Sylvia Allegretto, Arindrajit Dube, and Michael Reich: Do Minimum Wages Really Reduce Teen Employment? Accounting for Heterogeneity and Selectivity in State Panel Data."
- Michael Reich: "The Effects of Minimum Wages on SNAP Enrollments and Expenditures."
- David Neumark and William Wascher. "Minimum Wages and Employment." "Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws."
- Richard Burkhauser. "A Reassessment of the New Economics of the Minimum Wage Literature with Monthly Data from the Current Population Survey."
- Joseph Sabia. "Minimum Wages and Poverty: Will a $9.50 Federal Minimum Wage Really Help the Working Poor?"
- Jonathan Meer. "Effects of the Minimum Wage on Employment Dynamics."
How have these cards changed?
This is a running list of substantive updates, corrections, and additions to this card stack. Here is a summary of edits:
- April 30: Card 5 was updated to reflect that on April 30, 2014, the Senate failed to overcome a Republican-led filibuster on a bill that would have raised the federal minimum wage to $10.10.