November 05, 2021
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The reopening of the economy, coupled with the healthy stimulus in the American Recovery Act, gives us a chance to see how businesses respond to higher wages at the bottom. So far, it looks like they are very willing to pay higher wages, if they are forced to do so. This should make us even more comfortable about raising the minimum wage.
There has been a major national debate about raising the national minimum wage from its current level of $7.25 an hour in recent years. The last increase took effect in 2009. If we adjust for inflation over the last 12 years, the minimum wage has lost almost 30 percent of its purchasing power. If we wanted to restore the minimum wage just to its 2009 level of purchasing power, we would have to raise it to almost $9.50 an hour.
Even a $9.50 minimum wage would leave it far below its 1968 peak level in terms of purchasing power. If the minimum wage today had the same purchasing power as it did in 1968, it would be roughly $12 an hour. Just in case people don’t remember, the unemployment rate averaged less than 4.0 percent in 1968.
Recent proposals to raise the minimum wage have gone beyond just raising it back to its 1968 level. President Biden and the Democrats proposed increasing the federal minimum wage in steps to reach $15 an hour in 2026. Prices will increase somewhat further between now and 2026. But even taking this into account, a $15 minimum wage would have roughly 10 percent more purchasing power than the 1968 minimum wage.
This 10 percent gain over 58 years should not seem excessive. In the first three decades after we created a national minimum wage in 1938, the minimum wage rose in step with productivity growth. At the time, this meant increases of roughly 2.0 percent a year, beyond the increases in prices.
If the minimum wage had continued to increase in step with productivity growth, it would be more than $26 an hour today. That would translate into $52,000 a year for a full-time worker, or $104,000 a year for a two minimum wage-earning couple. That would be a very different world.
But the immediate question is whether the proposed minimum wage of $15 an hour by 2026 would cost jobs. We already had some evidence on this issue before, but the recent labor market tightening gives us more evidence. Several states and cities have set minimum wages far above the national level. Some have already hit, or are close to, the $15 an hour target.
There have been numerous studies of these wage hikes, and most find little evidence of job loss. This should give us confidence that setting a national minimum wage of $15 an hour by 2026 will not lead to major job loss.
The current labor market tightening is due in part to the $2,000 in checks from the federal government that most of us received this year, along with other pandemic benefits, which substantially strengthened people’s bank accounts, especially lower-paid workers. As a result, many of these workers feel that they can be more choosey about their jobs, even if that means going without a paycheck for a few weeks.
This has created a labor shortage, which in turn has meant large pay increases for workers in low-paying industries. This is clearest for restaurant workers, who are among the lowest paid workers in the economy and therefore the most affected by the minimum wage.
The average hourly wage for frontline restaurant workers has risen at an 18.1 percent annual rate in the last quarter. It is up by almost $2.00 over the last year, rising from $14.80 in September 2020 to $16.71 this September.
If we believed the stories that this sort of wage hike would lead to unemployment, we should find that restaurants are not willing to hire at the new higher wages. But the opposite is true. The job opening rate in August (the most recent month available) stood at 10.2 percent, more than 50 percent higher than its pre-pandemic high. In short, employers are desperate to hire workers, in spite of the sharp pay increases over the last year.
This gives us more evidence that we can look to have substantial increases in the minimum wage without fear of large-scale job loss. Raising the minimum wage would be a huge benefit to low-paid workers and their families. If we think work should be rewarded, a higher minimum wage is a great place to start.