Municipal Government

“The Issue isn’t the Minimum Wage, but the Effective Minimum Wage Population

September 26, 2013
Prof. Oren M. Levin-Waldman, Ph.D. Graduate School for Public Affairs and Administration

The minimum wage has recently been in the news because of the fast food workers’ strike for $15.00 an hour. Critics claim that would cause unemployment. There is a tipping point, but we don't really know where that is. The principal reason minimum wage increases have not led to disemployment effects is that the minimum has been so far below a market clearing wage.

In the case of the fast food industry increases, so long as they are below the tipping point, are likely to lead to increases in employment because the fast food industry is a labor monopsony. That is, they are the principal employers of minimum wage workers.

The issue, however, is not those who earn the statutory minimum wage, but those who earn the “effective minimum wage,” which may be defined as any wage between the statutory minimum and a wage which is 50 percent of average annual hourly earnings. Historically, efforts were made to keep the minimum at 50 percent of average annual earnings. Data from the Current Population Survey (CPS) for 2012 shows that the average annual hourly earning was $21.43. This means that the statutory minimum wage was 33.8 percent of the average annual hourly earning. It was 48.7 percent of the median hourly wage of $14.90. Had the minimum wage been indexed to inflation and remained at 50 percent of the average annual hourly wage, it would have been $10.72. Were the statutory minimum wage to be increased $10.72, it would still be below a market clearing wage, and therefore not likely have adverse employment consequences.

A look at the effective minimum wage population reveals a different picture presented by critics of the minimum wage. Critics often claim that those who earn the minimum wage are primarily teenager, and otherwise secondary earners. That is, they are not the primary earners in their households. It is true that 17.1 percent of effective minimum wage workers were 18-24 years old compared to 12.1 percent of all workers. But 67.6 percent of effective minimum wage workers were between the ages of 25 and 54, which is only 3.3 percent less than all workers. In 2012 47.5 percent of all workers were women, compared to 56.5 of effective minimum wage workers which is 18.9 percent higher. 7 percent of all workers were in food preparation and service related occupations, but 12.5 percent of effective minimum wage workers were in these occupation, which was a difference of 78.6 percent. Also a higher percentage of effective minimum wage workers were black. Consider that the percentage of black effective minimum wage workers was 20.9 percent higher than all black workers, but the percentage of black workers earning more the average annual hourly wage was 38.2 percent less.

Of course critics might point to low wage workers’ lack of skill. On average, those earning an effective minimum wage are less educated in that more have no more than a 12th grade education and fewer have Associates, BA, and/or Graduate and Professional degrees. But the common portrait of minimum wage workers being teenagers looking for some funny money simply does not hold here. Those who earn an effective minimum wage are more likely to be women, black,  in their prime working years, and working in food preparation and service related occupations.

Therefore, when fast food workers go on strike for wages that appear to be in lines with the median hourly wage, we as a society should consider just who these workers are. Those who like to dismiss them as secondary earners are trying to obscure the moral issue here, which is if they don’t need the money, then there is no good reason to pay a higher wage that may lead to lower employment. Once it becomes clear that not only might there not be adverse employment effects, but that these are workers who genuinely may need the money — and being a secondary earner in no way means that person’s income is not essential to the support of that person’s household — the moral imperative to raise the minimum wage becomes even stronger.

September 25, 2013

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