The Real Value of the Minimum Wage

July 22, 2011

By Eli Markham

Two years ago Sunday, the federal minimum wage increased from $6.55 an hour to $7.25 an hour. It was the third step in a long-overdue series of increases that began in 2007. For the previous decade, the minimum wage had been stuck at $5.15 an hour. The increase on July 24, 2009, meant a real raise for 4.5 million people. But since then the minimum wage has been frozen. While the minimum wage has stayed the same, inflation has eroded its purchasing power. Minimum wage workers are now 5% poorer in real terms than they were two years ago today.

Congressional neglect of the minimum wage is a longstanding tradition. Since 1968 the wage has lost more than 40 percent of its value to inflation. Had it kept pace with inflation, the minimum wage would now be around $10.38 an hour. While Congress delays, the lowest paid workers suffer. That has never been more evident than today, as gas and food prices are through the roof.

Raising the minimum wage – and indexing it to adjust each year to match rising costs of living – would not just help struggling families make ends meet, it would help bolster the recovery. The engine of the American economy is consumer spending, and right now that engine is stalled. The economy is stuck in a vicious cycle: people get laid off; they spend less; and reduced sales keep businesses from rehiring. To get back on the right track we need to boost consumer spending. The Economic Policy Institute estimates that raising the minimum wage to $9.50, as President Obama proposed during the 2008 presidential campaign, would generate more than $60 billion in new consumer spending.

Conservatives continue to shriek that raising the minimum wage would cause unemployment. They would be right if the entire world consisted of a supply line and a demand line, like an Econ 101 graph. But it doesn’t, and in the real world, benefits to productivity, retention and morale offset the increased wages. Two decades of rigorous empirical research has revealed that increases in the minimum wage have not cost jobs or slowed rehiring, even during times of high unemployment.

Businesses are sitting on $2 trillion in assets, Congress is squabbling over debt, and 14 million workers are unemployed. We need consumers to go out and spend money, but right now few can afford to. Raising the minimum wage won’t fix the economy on its own, but it’s a good start. Our country can’t afford to let another two years go by at $7.25 an hour.

Eli Markham is a researcher at the National Employment Law Project

The FactsThe Facts

$10.90

How much the federal minimum wage would be if it had kept up with inflation over the past 40 years. Instead, itís $7.25. Learn More

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