The Minimum Wage and those Inconvenient Facts

April 3, 2014
Oren Levin-Waldman, Ph.D.

Critics of the minimum wage often assert that not only is it misguided because of its adverse employment effects, but it is poorly targeted because most minimum wage earners are not poor. Rather they are secondary earners who are either spouses or teenagers.

And those who scoff at claims of income inequality maintain that those at the bottom lack the skills necessary to command higher wages in an economy ever more biased towards advanced technology and skills. But these claims are really half-truths that miss some inconvenient facts.

The first inconvenient fact is that while it may be true that many wage earners earning at or near the minimum wage — an effective minimum wage — may not be earning most of their family’s total income, they are earning a sizeable portion that even if they technically are only “secondary” earners their income is still essential to the maintenance of their families. Consider that in 2013, according to data from Census Bureau’s Current Population Survey (CPS), a full time earner at the 10th percentile earning $12,000 in wages was living in a family where the total family income was $25,005.

At the 20th percentile, this low wage worker was earning $20,000 or $9.62 an hour (assuming 40 hours a week at 52 weeks a year) in a family where total income was $37,000. At $9.62 an hour, which is still less than the proposed minimum of $10.10 an hour, this worker is indeed a primary earner and the worker at the 10th percentile is an essential secondary earner. And yet, despite that person’s wage income of only $12,000, this person’s total personal income was really $17,000, which is now above the statutory minimum wage earner’s income of $15,080, and it also effectively makes that person a primary earner. Where, then, does this leave the statutory minimum wage worker? Somewhere in between the 10th and 20th percentiles of the wage distribution. And because we really are talking about the effective minimum wage earner, this person is most likely closer to the 20th percentile.

The second inconvenient fact is that when we look at the data from 2002 to 2013, and particularly at two periods,  first from 2006 to 2009 and then again from 2009 until 2013, it becomes clear that institutions, like the minimum wage, do have a role to play in reducing income inequality. The ratio of the top fifth to the bottom fifth rose 3.8 percent from 13.1 percent in 2002 to 13.6 percent in 2005. It actually decreased to 12.9 percent in 2006. In 2007, however, Congress enacted the last increase in the minimum wage that was to be carried out in three phases beginning in 2007 and ending in 2009. By 2009, after the last phase of the increase took effect, the ratio dropped to 11.3 percent, which was a decrease of 12 percent.

Wage inequality then began to creep up again, rising from 11.5 percent in 2010 to 12.5 percent in 2013. And yet, it is important to understand what was really going on here. The reason for the drop in inequality was due primarily to average incomes of those at the bottom rising at higher relative percentages than the average incomes of those at the top. In 2006 the average wage income of those in the bottom fifth was $8,116 and by 2009 it was $10,390. Meanwhile the average wage income of the top fifth was $104,628 in 2006 and $117,060 in 2009. Whereas the average incomes of the bottom rose 28 percent it only rose 11.9 percent for those at the top.

Between 2009 and 2013, however, the average incomes of those at top rose another 10 percent while the average income of those at the bottom actually fell by .4 percent. Is it a coincidence that income inequality decreased during the three year period that minimum wage increases were implemented and began increasing again as the minimum wage remained flat? Perhaps. But it may be one too close for comfort. What really has to be considered here is what happened to the wages of those earning above the statutory minimum during these two periods. And this is where   the data actually brings our two inconvenient facts together.

In 2006, the wage income of those at the 20th percentile was $17,000 and by 2009, it was $20,000, which was an increase of 17.6 percent. Meanwhile, the wage income of the 80th percentile increased only 11.7 percent from $60,000 in 2006 to $67,000 in 2009. But by 2013, the wage income of the 20th percentile remained $20,000 while it increased 7.5 percent to $72,000 for those at the 80th percentile.

Of course critics will argue that raising the minimum wage is nothing more than a feel good measure. But the data here is very suggestive. Just as they would like to point out that the data from the CBO study claiming that as many as 500,000 jobs could be lost were the minimum wage to be increased to $10.10 an hour cannot be ignored, this data cannot be ignored either. If anything, it only underscores the CBO’s conclusion that more than 16 million workers would get a pay raise. Wages appear to have risen for at least 20 percent of full time workers following the last three minimum wage increases. Moreover, wages rose 13.6 percent for those at the 30th percentile from $22,000 in 2006 to $25,000 in 2008.

The sum total of this is nonetheless clear. Labor market institutions like the minimum wage do appear to lead to pay increases for a significant percentage of the labor market, who are also primary earners while, at the same time reducing wage inequality. The same critics are often first in line to argue how supply-side tax cuts to the wealthy will not only grow the economy but will trickle down to the bottom in the form of more jobs and higher wages. But the 2009-2013 period is actually quite instructive here. In 2009 the great recession comes to an end and during this period productivity increased. According to the standard textbook model, increases in productivity should lead to wage increases without having inflationary pressure. Despite productivity increases, those benefits were not shared with workers in the form of higher wages.

Arguably, the same critic will retort that wages at the bottom may well be depressed during this period because of deep unemployment and long-term unemployment. But the critic still has to contend with the fact that wages at the bottom were rising in 2007, at the beginning of the recession and through 2008 and 2009 at the height of the recession, following a federal mandate that minimum wages do so.  As wages continue to stagnate and the middle class loses position, it may be time to stop making excuses and address that inconvenient fact that the minimum wage helps a sizeable portion of the labor marker, who if they aren’t primary earners are certainly essential secondary earners, and also helps to reduce the wage gap between the top and the bottom.

April 2, 2014

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