by Jurgen Brauer and Nick Anglewicz, January 2005
Copyright: J. Brauer. No reproduction without permission.

About 140 million Americans are in the workforce. A small but not insubstantial number of them – 2.2 million people – earn minimum wage, or less. Introduced in 1938 in the wake of the Great Depression, the fundamental idea of the minimum wage was to provide a "living wage" to those in desperate need. Since then, the federally set minimum wage has been increased from time to time, most recently in 1997 to $5.15 per hour. And therein lies a problem. Simply put, what a wage of $5.15 bought in 1997, it does not buy in 2005.

Between 1997 and 2003, average consumer prices rose by 14.6 percent, housing (including rent and utilities) rose by 17.9 percent, and medical care by 26.6 percent. In contrast, the $5.15 minimum wage rose not at all.

Between 1997 and 2003, average consumer prices rose by 14.6 percent, housing (including rent and utilities) rose by 17.9 percent, and medical care by 26.6 percent. In contrast, the $5.15 minimum wage rose not at all. In effect, minimum wage earners lost a chunk of their already sparse income. Indeed, in a story that made national headlines last December, the National Low Income Housing Coalition calculated that to pay rent and utilities on what the government calls an "affordable" two-bedroom apartment, the average American would have to earn $15.37 an hour, nearly three times the minimum wage. (The comparable figure for an Augustan was calculated as $14.12 an hour. The federal minimum-wage law, incidentally, does not apply to certain categories of workers, such as restaurant service personnel or teenagers in the first 90 days of continuous employment.)

Do we need to raise the minimum wage?

To answer that, we need to understand who the minimum-wage earners are. Half of them – a bit more than a million people – are less than 25 years old; about 500,000 of the minimum-wage earners in fact are teenagers, many working after school as part-timers in the retail sector to afford, not food, housing, or medical care, but the cell phone, the first car, and fashion clothing. An additional large number of minimum-wage earners are retirees, such as Wal-Mart "greeters" and grocery store "baggers." Unlike 1938, for the majority of minimum-wage earners today, minimum wage is not a matter of a "living wage." Most already have essential needs like housing taken care off.

For 2003 the federal government calculated that the poverty level for a childless single person under 65 years of age was $9,573 a year. By that calculation, a full-time minimum-wage earner lives in poverty. It means licking one's daily bowl of soup mighty clean.

Even with these adjustments, there remain, however, around 800,000 people working full-time at minimum wage (plus those who may work several part-time jobs at minimum wage). The average working American puts in 1,800 hours of work a year. At minimum-wage that works out to $9,270 on the year. For comparison, for 2003 the federal government calculated that the poverty level for a childless single person under 65 years of age was $9,573 a year. By that calculation, a full-time minimum-wage earner lives in poverty. It means licking one's daily bowl of soup mighty clean.

What's to be done, if anything? The Democrats' proposal to raise the minimum wage won't fly, not only because it is unlikely that Congress would ever approve a $15.37/hour minimum-wage, but largely because it makes no sense to impose a substantial cost on mall-owners (and their customers) so that spending-happy teenagers can earn more in their after-school jobs. If only part of the minimum-wage population constitutes a problem, then solutions must be targeted to that part of the population.

Economists favor a drastic but eminently sensible solution: abolish the minimum-wage and let the labor market set wages freely. Low wages would drop even lower of course – why else is there a need for a minimum wage in the first place? – and this would keep at least some teenagers busy with school work instead of hitting the malls as sellers and shoppers. But for that part of the minimum-wage population that constitutes an actual social problem – the 800,000 or so full-time workers eking out a living at the poverty level – the economist would prescribe a (better-functioning) means-tested social support system linked to education and training support.

To understand why this is a superior solution, one needs to appreciate that all of us are paying for the poor anyway. The only question is whether we are doing so efficiently or inefficiently. At the moment, government "saves" a budgetary dollar by requiring all businesses (and their customers) to pay minimum wage even if it goes to the teenagers running America's malls. But a cost imposed on all businesses and all customers in favor of the million or so people whose essential life-needs are already taken care off by Mom and Dad is inefficient. Much better to get lower prices at the mall (because of lower wages) and then trade in some of the gain for higher taxes to target the other million minimum-wage earners whose essential life-needs are not taken care of. That's efficient, more efficient at any rate then the current muddle.

Whatever the solution, it is long overdue. In 2001, the annual salary cap for government officials was raised to $400,000 (President Bush's income). Isn't it time we also raised the living standard for the poor?