This is the first of a maybe occasional series on current policy and/or legal issues that will provide just enough information for those occasions where you're tricked into a conversation and don't want to sound like an idiot.
In last night's State of the Union, the President reiterated his call for an increase in the minimum wage. You'll probably be hearing about it a lot in the coming weeks and may find yourself in a situation where someone wants to discuss it with you. In case escape isn't a physical or polite option, here's a primer.
1. What's a minimum wage? At the federal level, the minimum wage (currently at $7.25 per hour) is established by the Fair Labor Standards Act of 1938 (FLSA). As a general matter, it applies to every employer or employee who engages in interstate commerce, making it the federal labor/employment law of broadest applicability. This was deliberate — it was meant to establish a wage floor. There are some big exceptions, like certain professionals who make a minimum salary and most agricultural workers. There are some small, random ones, like people who make wreaths at home. And some folks are allowed to be paid a sub-minimum wage, like tipped employees and, disturbingly, some people with physical or mental disabilities. Many states also have minimum wage laws. If they're lower, federal law preempts, but higher is just fine.
2. What is the President proposing? First, he is asking Congress to pass legislation introduced by Senator Tom Harkin (D-Iowa) and Representative George Miller (D-Ca) that would incrementally raise the minimum wage for all workers to $10.10 per hour. This is slightly higher than what he proposed in last year's address ($9 per hour), presumably because folks over at the White House finally realized it was silly to call for less than what was being proposed by his party in Congress. The same legislation would also index the minimum wage to inflation, meaning that it would keep pace with the cost of living and take the discussion out of the political sphere. It would also raise and index the minimum wage for tipped workers to 70% of the minimum wage, which is what it was when the current "tip credit" wage of $2.13 was set.
The President also announced his plans to issue an Executive Order raising the minimum wage for employees of future federal contractors to $10.10 per hour. Depending on the scope of the order, this could impact anywhere between 200,000 to 560,000 low wage workers on federally funded service and construction contracts.
3. Why do we have a minimum wage? Prior to 1938-ish, working conditions in this country were rough. Although there were some state-law attempts at regulating hours and wages, particularly for children, for the most part it was a sweatshop-style free for all. Working conditions overall were terrible for the vast majority of workers. Setting aside safety issues, poverty (or, at least, the inability to support a family) was widespread despite folks working excessively long hours. Also, not unrelated, this was during the Depression and unemployment was a staggeringly high 18-19%. So, incredibly long and twisty story short, the FLSA was passed with three goals in mind: (1) increase wages so that people who worked full time could earn enough to actually clothe, feed, and house themselves; (2) establish a 40-hour workweek with overtime so as to spread employment; and (3) provide a boost to business and the economy overall — more on that in a minute.
4. But...is a mandatory minimum wage constitutional? Yes. Spare me the court-packing, switch in time saved nine, big government sob stories and save it for your Federalist Society meetings. The constitutionality of the minimum wage has been decided and reaffirmed over and over again. It's been 75 years. Move on.
5. So, why now? There are two main reasons. The first is purely political. Democrats expect that it will be a good stump issue for them in the upcoming 2014 midterm elections. So expect to hear about this issue a lot in the coming months.
The second reason is that, ultimately, it is good policy. The current minimum wage at $7.25 is two dollars less in real dollars than it was in 1968. People who work full time at the minimum wage earn only $15,080 per year. While this is somewhat above the poverty line for a single person (it is only 65% of the poverty line for a family of four), there are very few places where an individual can actually support themselves earning so little. That's why so many people who make only the minimum wage have to rely on government assistance (yes, that means taxpayers are subsidizing the profit margins of a lot of the biggest corporations in America, including Wal-Mart and various fast food chains). A raise in the minimum wage will most obviously benefit the lower and middle class workers who earn it. But because those workers are more likely to spend the additional money than to save it, there's a strong argument that it will give the entire economy a boost.
6. Who makes the minimum wage? About 1.6 million people make the minimum wage. Teenagers make up about 1/3 of that population, though it would be a mistake to think they are just doing it for spending money (studies have shown that significant numbers of teen workers do so to help support their families). Women edge out men by a small margin. Most minimum wage jobs are part time, in retail, and disproportionately in the South.
7. Won't this kill jobs? This is the most common argument against raising the minimum wage, and has been since debate began over establishing one in the first place. Very few economists believe raising the minimum wage will have a widespread negative affect on employment — this argument is reserved for the realm of politicians and the corporations that fund them. Some economists argue that raising the minimum wage by 10%, for example, will reduce employment for teens and unskilled labor by as much as 1 to 3 percent. Others, particularly more recent cross-border studies, have found close to zero negative impact on employment. As a practical matter, economic studies on the minimum wage are notoriously difficult because there are so many externalities involved and you're making assumptions about the behavior of non-rational actors (humans). Also problematic is that so many of the economists studying this particular issue are either themselves or aligned with advocates for a specific policy position.
So, in other words, it's unclear. But, even if there is a negative employment effect at the higher end of the studies, the overall economic impact is likely to be positive because it will still be a collective increase in earnings for the lower and middle class. More financial stability for these folks, less reliance on government assistance, and an increase in purchasing power benefits us all. Plus, although a relatively small number of workers make only the minimum wage, hiking it typically results in wage increases across the board as companies adjust their pay scales.
8. Are there alternatives? One, which gets a lot of conservative support, is the Earned Income Tax Credit (EITC). It's a refundable tax credit available only to the low-income employed. On the one hand, it provides a supplement to the wages of low-wage workers, especially those who are married with children (single persons get a smaller supplement). On the other, though, because it pulls more people into the labor force at already artificially low wages, some economists argue that the EITC actually drives down wages and leads to greater subsidization of the wages of workers for the Walmarts of the world.
9. So, should we raise it? Yes. Even if there are some modest unemployment effects for young and unskilled workers, which is by no means certain, raising the minimum wage will still be an overall benefit to the economy. There is a fairness argument to be made, that people who work hard should be able to support themselves and their families. But, since fair only counts in, uh, horseshoes and hand grenades, here's the bottom line: either we raise the minimum wage or we deal with the consequences of increasing numbers of workers needing to rely on public assistance to meet their basic needs.