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THE FEDERAL MINIMUM WAGE
By Steven Lee
INTRODUCTION
Protesters call for an
increase in wages outside
a McDonald’s restaurant
in Detroit. The number
of protests calling on
corporations to pay
higher wages has steadily
grown in the last two
years.
Source: Paul Sancya—
Associated Press
Fresh off a reelection victory and amidst emerging labor protests across
the country, President Barack Obama called on Congress to raise the
federal minimum wage during his annual State of the Union address on
February 2013. Arguing that such a move would “raise the incomes of
millions of working families,” the president proposed the minimum wage be
raised from $7.25 to $9.00 an hour.
Since the president’s call for action, protests for higher wages have
continued, targeting Wal-Mart, McDonald’s, and other companies, and
advocates of the federal increase have convinced states and cities to make
similar increases to their minimum wages. Yet, despite President Obama’s
push and a year of mounting external pressure, Congress has not budged,
and the federal minimum wage has remained constant since it was last
increased to $7.25 an hour in 2009.
With state statutory minimum wage rates ranging from $9.50 an hour in
the District of Columbia to $0 in five states in the South, politicians across
the country remain deeply divided on the level of hourly compensation that
should be guaranteed to individuals that are working full-time. But the
divide between minimum wage increase supporters and detractors goes
beyond politics. Economists remain just as split on whether such an
increase would help or hurt the economy; various policy analyses have
shown contradictory results.
While it is ultimately the job of Congress to regulate the federal
minimum wage, it is important for you, as a member of the NEC, to
carefully parse through the conflicting studies and assertions, and together
propose the right course of action for the country. Should the federal
government raise the minimum wage, or should the current level be
maintained? Are there other initiatives, such as expanding the Earned
Income Tax Credit, which might be more effective than a higher minimum
wage in fighting income inequality and poverty?
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EXPLANATION OF THE PROBLEM
Historical Background
While current employers and employees might take the existence of
minimum wage laws for granted, the United States, for most of its history,
did not have such a law guaranteeing a baseline hourly wage for workers.
From the first state minimum wage law in 1912, to conflicting Supreme
Court decisions, the history of minimum wage laws is important to review as
you make an informed decision on how Congress should act now.
Minimum Wage and the Supreme Court
The first law to establish
a minimum wage was
enacted by
Massachusetts in 1912.
The earliest minimum
wage laws did not
always apply to all
workers. Most laws were
designed to protect
children and women in
the workforce.
For more than a hundred years after the founding of the country, state
and federal governments were relatively unconcerned with labor conditions.
Firms were mostly free to set hours and wages and hire workers as they
pleased.
That began to change with the turn of the twentieth century as workers
increasingly moved to the city to work in factories and women began joining
the workforce, bringing with them a push for better working conditions and
higher wages.
States began establishing regulations on the workplace, often by setting
ceilings on working hours and protecting children and women laborers. In
1912, Massachusetts established the first law in the United States that set
minimum wages for women and children. However, adherence to that law
was largely voluntary as the only penalty for disobeying the minimum wage
rule was being publicized as a non-compliant company.
Nonetheless, over the next decade, fifteen states, the District of
Columbia, and Puerto Rico would all follow suit and establish minimum
wage laws targeted at children and women. In protest of the Wage Board—
tasked with setting the appropriate minimum wage—that Congress
established in DC, a hospital and an elevator operator took the board
members to court, alleging a constitutional violation. Following the
precedent on previous cases involving the regulation of working conditions,
the Supreme Court ruled in 1923 that minimum wage laws violated the US
Constitution. In the 5-3 ruling, the Court explained that by requiring a
minimum wage, the government was interfering with the freedom to
negotiate contracts, a violation of the Fifth Amendment. Between 1923 and
1937, the Supreme Court struck down four additional minimum wage laws
established in other areas of the country.
Meanwhile at the federal level, President Franklin D. Roosevelt was in
the midst of proposing and passing legislation designed to help alleviate the
economy suffering through the Great Depression. Included in one such
law, the National Industrial Recovery Act of 1933, was a provision that had
companies and employers establish minimum rates of pay for their
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employees. Unfortunately for Roosevelt, the Supreme Court struck down
the law just two years later as improper government overreach.
West Coast Hotel
Co. v. Parrish – a
Supreme Court case in
1937 that allowed states
to establish minimum
wage laws
Fair Labor Standards
Act – a 1938 law that
established the federal
minimum wage
Covered, nonexempt
employee – term used
by the Department of
Labor to indicate workers
that are affected by
federal minimum wage
regulations
The Birth of the Federal Minimum Wage
When Washington’s minimum wage law came before the Supreme
Court in 1936, there was little indication that the court would decide any
differently than they had in the previous five cases involving state minimum
wage laws. Furthermore, the court had decided six months prior that a
similar law in New York was unconstitutional.
However, defying all expectation, the Supreme Court ruled 5-4 in
West Coast Hotel Co. v. Parrish (1937) that minimum wage laws
were allowed under the Constitution, overturning the court’s precedent on
the issue.
Roosevelt saw this shift in the court and his resounding presidential
reelection victory in 1936 as a good opportunity to push through minimum
wage regulation. Just two months after the Parrish decision, Roosevelt
proposed a bill that established a 40¢ per hour wage floor, a 40-hour
workweek, and strict regulations on child labor. Though this initial bill
failed in Congress, Roosevelt tried two more times. Eventually, Roosevelt
signed into law the Fair Labor Standards Act of 1938, which
introduced the first federal minimum wage, set at 25¢ an hour. Three years
later, the Supreme Court upheld the law.
That was not the end of Supreme Court involvement in the issue of
minimum wage laws. In 1976, the Court ruled that the federal minimum
wage established in the Fair Labor Standards Act could not apply to state
and local government employees. This decision was ultimately overturned
just nine years later.
Since the establishment of the Fair Labor Standards Act, Congress has
added amendments to the original law to raise the minimum wage or the
scope of the law. In one such amendment, Congress in 1961 began to allow
retail and service companies to employ students at 15% below the minimum
wage.
The Current Minimum Wage System
As mentioned earlier, $7.25 is the current federal minimum wage rate.
A number of factors determine whether this figure applies to a certain
worker. One of these factors is whether someone is a covered,
nonexempt employee as defined by the Department of Labor. An
employee is covered if he or she works for a company that makes more
than $500,000 in yearly revenue or a company that engages in interstate
commerce. In addition, an employee may be covered if they themselves are
engaged in interstate commerce—such as using mail or telephones for
interstate communication—regardless of whether the company is directly
engaged in interstate commerce. The Department of Labor has exempted
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some categories of workers from federal minimum wage laws, such as those
who work as babysitters.
Another factor in this determination is whether the worker is under 20
years of age or receives tips as part of his or her occupation. The Fair Labor
Standards Act allows companies to pay employees under 20 years of age
$4.25 an hour for their first 90 days of work. The act also allows employers
to pay as little $2.13 an hour to tipped employees, as long as their total
wage, including tip, exceeds the federal minimum wage rate.
The final factor that determines whether a person must be paid the
federal minimum wage is where he or she is employed. If one is employed
in one of the 23 states that has a minimum wage rate that is higher than
$7.25, companies must pay that rate as a minimum. For those employed in
other states, the federal minimum wage applies. Cities are also free to set
minimum wages. If a city’s minimum wage is higher than the ones set forth
by the state or the federal government, that wage applies.
Recent Developments
Consumer Price
Index for Urban
Wage Earners and
Clerical Workers – a
special measure of
inflation calculated by the
Bureau of Labor
Statistics; places a higher
weight on food, apparel,
and transportation price
changes than other
measures of inflation
From 1997 to 2007, Congress declined to pass any amendments to
increase the minimum wage, marking the longest period that the minimum
wage had remained at the same nominal level. In 2007, Congress voted to
raise the minimum wage from $4.25 to $5.85, and eventually to $7.25 in
2009.
Since challenging Congress to raise the minimum wage to $9.00 per
hour, President Obama has increased his recommendation for a minimum
wage target. In February 2014, the president signed an executive order
requiring all companies who contract with the federal government to pay a
minimum hourly wage of $10.10 by 2015. The executive order further
stipulated that this new minimum wage for government contractors be
increased every year according to changes in the Consumer Price Index
for Urban Wage Earners and Clerical Workers (CPI-W).
Some state and local governments have also proceeded on their own in
raising the minimum wage. For example, recent legislation approved in
Connecticut is set to raise its minimum wage to the target recommended by
the president by 2017. Some municipalities have gone even further. A
recent ordinance passed by the city of Seattle increased the city’s minimum
wage to $15 an hour, with the hike set to go into effect as quickly as three
years for some businesses. Other cities, such as San Francisco, are
considering a similar increase for their own cities.
Congressional Action
While Congress has not passed a minimum wage bill into law since
voting on the Fair Minimum Wage Act of 2007 that established the current
federal minimum wage, members of Congress have submitted numerous
bills for consideration that would increase that rate. The most substantial of
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these efforts was led by Representative George Miller (D-CA) and Senator
Tom Harkin (D-IA), who submitted the Fair Minimum Wage Act of 2013
to both chambers of Congress in March 2013. The bill called for the
minimum wage rate to rise to $8.20 per hour three months after its
enactment, gradually leading up to $10.10 per hour two years afterwards.
After the increase to $10.10, the minimum wage would increase based on
the CPI-W. Almost a year later, Senator Harkin introduced an almost
identical bill for Senate consideration. An indication of the divisiveness of
the issue, the vote to proceed on that bill failed on party lines, with all but
one Republican senator voting against proceeding on the measure.
FOCUS OF THE DEBATE
Conservative View
In the last congressional
action on the federal
minimum wage, a
motion to proceed on a
bill to increase the
minimum wage failed in
the Senate in early
2014.
Conservatives are generally opposed to an increase in the federal
minimum wage. As champions of the free market and free enterprise,
conservatives are often skeptical of government involvement—such as the
minimum wage—in the economy. Some conservatives argue that placing
restrictions on wages that employers can pay to potential employees could
hamper economic growth.
Moreover, many conservatives argue that raising the minimum wage
would reduce job growth and produce higher unemployment rates. Instead
of paying the mandated higher wage to their minimum wage workers, firms
might find it more profitable to lay off those workers instead. Companies
would be less productive and fewer people would have jobs, causing
problems for the economy. In this situation, as some conservatives argue,
the minimum wage would hurt, not help, the working poor. Instead of
boosting the incomes of the poor, those individuals could potentially be laid
off instead. Some conservatives have even called for abolishing the federal
minimum wage.
Thus, conservatives would rather see an expansion of the Earned
Income Tax Credit (EITC), which gives money to individuals who have low
incomes.
Liberal View
Liberals are almost united in their support for an increase in the
minimum wage. They point out that because the federal minimum wage is
not tied to any measure of inflation, it is continuously decreasing in value.
Many liberals are quick to point out that, in terms of current dollars, the
federal minimum wage was higher under the Reagan Administration than it
is now currently.
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Living wage – income
necessary for an
individual to meet their
basic needs
Liberals see raising the minimum wage as a way to reduce poverty and
income inequality. Many point out that while worker productivity has
quickly risen since World War II, minimum wages have on average
remained the same. Some argue that raising the minimum wage would have
a negligible impact on employment levels and a positive impact on the
overall economy. According to the argument, a rise in the minimum wage
would increase wages for millions of workers who would then in turn use
that money to consume goods, spurring the economy. Furthermore, liberals
point out that compared to other developed countries, the value of the US
minimum wage is a smaller percentage of the national median wage.
While most liberals would be content with a $10.10 an hour minimum
wage that would be consistent with the rates from the 1960s and 1970s,
others have called for the minimum wage to be $15 an hour as part of a
living wage.
Finally, liberals would prefer that any future minimum wage would be
automatically determined by changes in inflation. Most liberals see this as
fair for both employees and employers while also convenient for future
lawmakers to not have to argue for a minimum wage increase every year.
Presidential View
President Obama has been fully supportive of the liberal position on
this issue. The president made raising the minimum wage to $9.50 a
promise during his first campaign and has since called for the minimum
wage to be increased to $9 an hour and to $10.10 an hour. The president
has not specifically supported raising the minimum wage to $15 an hour as
some in his party would suggest.
As mentioned earlier, the president signed an executive order to raise
the minimum wage of all government contractors to $10.10 an hour and tie
all future increases to inflation.
Interest Group Perspectives
United States Chamber of Commerce
One of the largest political lobbying groups in the United States, the US
Chamber of Commerce (USCC) is a business advocacy group staunchly
opposed to increases to the minimum wage. Similar to conservative
arguments, members affiliated with the USCC contend that raising the
minimum wage would place undue burden on small businesses and be
damaging to the overall economy.
As the main lobbying group representing general business interests, the
USCC points out that firms would hurt the most due to the increase in
operating costs, restricting their ability to hire and compete with foreign
companies. Ultimately, the USCC would prefer the federal government
make changes to other programs like the EITC and the Additional Child
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Tax Credit rather than dictate how much businesses should pay their
employees.
American Federation of Labor and Congress of Industrial Organizations
The American Federation of Labor and Congress of Industrial
Organizations (AFL-CIO) is a federation of labor unions in the United
States. As the umbrella organization for labor unions, the AFL-CIO
supports increasing the minimum wage. AFL-CIO organizers contend that
it is nearly impossible to live on income from a full-time, minimum-wage
paying job. Furthermore, they point out that if the minimum wage were tied
to the growth in worker productivity, the minimum wage would be $18.67
an hour as of 2012.
Some AFL-CIO members argue strongly for an increase in minimum
wages to $15 an hour. They argue that even at $10.10 an hour, minimumwage workers would be reliant on food stamps and other anti-poverty
programs. Thus, they argue that raising the minimum wage to $15 an hour
would help ameliorate poverty and allow all full-time employees to lead a
decent life.
Cato Institute
James A. Dorn (left), vice
president for academic
affairs at the Cato
Institute, argues in a
debate that the minimum
wage should be
abolished.
Source: Adelade Mandeville—
Intelligence Squared U.S.
Like conservative politicians and the USCC, the Cato Institute opposes
raising the minimum wage. In its most recent policy analysis on the subject,
titled “The Negative Effects of Minimum Wage Laws,” Mark Wilson of the
Cato Institute argues that businesses would not absorb the costs of a higher
minimum wage through a hit in profits but would instead fire employees,
cut worker hours, and reduce benefits. Wilson points out that in this case,
young workers and minorities would be especially affected, the same groups
of workers that lawmakers are aiming to help. Some members of the Cato
Institute have called for the abolishment of the minimum wage for this
reason.
POSSIBLE SOLUTIONS
The potential directions for Congress are clear, but the one that would
be most beneficial for the country is not so clear. Congress can choose to
raise the federal minimum wage, abolish it, or leave it at current levels. But
by how much should Congress raise the minimum wage? If the minimum
wage is abolished, should Congress increase funding to other programs to
aid the poor?
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Raise the Federal Minimum Wage
Economists are divided
on whether the
minimum wage
decreases employment.
Congress could simply raise the minimum wage. Though Washington
remains deeply divided on this solution, such a move would be popular.
Recent polls show consistently that at least two-thirds of Americans support
some increase in the minimum wage.
The Economic Policy Institute (EPI) estimated in its most recent paper
analyzing a potential federal minimum wage increase that increasing the
hourly minimum wage to $10.10 would bring single parent, minimum wage
workers above the poverty line. Furthermore, the EPI contends that 16.7
million workers would directly see their wages increase with such a hike
while an estimated 11.1 million workers would also see their wages increase
as employers adjust their overall pay scales. The EPI estimates that this
wage increase would boost the economy by $22.1 billion, supporting an
additional 85,000 jobs. As the proposed Fair Minimum Wage Act of 2013
would do, the minimum wage would increase gradually before it actually hit
$10.10 an hour.
As mentioned earlier, one of the main conservative arguments against
the minimum wage is that it could drive down employment as firms fire
workers rather than paying them the higher wage. However, proponents of
raising the minimum wage point to economic research that compared fastfood restaurant employment in Pennsylvania and New Jersey. While
initially New Jersey and Pennsylvania had the same minimum wage, New
Jersey had increased its rate from $4.25 to $5.05. The economists David
Card and Alan B. Krueger found that despite the increase, there were
negligible changes in employment between New Jersey and Pennsylvania.
Abolish the Minimum Wage or Keep it at Current Level
Alternatively, Congress could abolish the minimum wage. Though no
formal bill has been introduced in either chamber to this effect,
Republicans both publically and privately have decried the minimum wage
and sometimes called for its abolition.
Proponents for such a move say that the minimum wage is actually
hurting the poor and that a minimum wage hike would not be beneficial to
the individuals that supporters imagine it would help. According to the
Bureau of Labor Statistics, a third of minimum-wage workers are teenagers.
The Heritage Foundation, a conservative think tank, found that the average
household income for individuals working minimum wage is $42,000 per
year, which would only be considered income below the poverty line if the
worker were single with 8 or more children.
Detractors of the minimum wage are not without academic evidence to
support their theories. In fact, while some studies show that the minimum
wage have negligible effects on employment, a substantial number of studies
actually show that employment falls with a rise in the minimum wage. The
Congressional Budget Office estimates that with an increase in the
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minimum wage to $10.10 by 2016, the number of people below the poverty
line would decrease by 900,000 but employment would fall by around
500,000. Even with an increase to $9, employment would fall by 100,000.
Tie the Minimum Wage to Measures of Inflation
Of the inflation
measures calculated by
the Department of
Labor, CPI-W, CPI-U,
and Chained CPI are
the most widely used.
Due to the unique way
Chained CPI is
calculated, it tends to
report lower levels of
inflation than the other
measures.
Congress must also determine, as a separate issue, whether to allow the
minimum wage rate to automatically increase based on inflation. One
criticism of the current minimum wage system is that if left alone, the real
value of the minimum wage slowly decreases over time as general price
levels rise. Such a system would cause minimum wages to be highly
dependent on gridlock and political forces rather than economic ones.
Instead, if the federal minimum wage increased with inflation, the status quo
value would be firmly set for the future with manual changes only needed in
emergency scenarios.
One potential problem with this solution is establishing the best
measure of inflation to tether the minimum wage. While Democrats prefer
using the CPI-W measure that is tailored for changes in prices for workers,
other measures, such as the CPI for all Urban Consumers (CPI-U)—
changes in prices for urban households—or the Chained CPI for all Urban
Consumers, which changes in formula as people’s consumption behavior
changes, are alternative options. In particular, the Chained CPI tends to
produce lower inflation levels. The theory behind the measure is that if
prices for good A increases dramatically compared to good B, people will
stop purchasing good A and purchase more of good B. Thus, they are less
affected by the increase in good A’s prices. CPI-W and CPI-U does not
take this into account.
Consider Expanding Alternative Programs
A final option to solve this issue is to expand a completely different
poverty program. One popular program that is frequently cited as a better
program to reduce poverty is the Earned Income Tax Credit. Though
liberals argue that the EITC and the minimum wage serve different
functions and changes in one should not mean no change in the other,
unlike the minimum wage, politicians across ideologies largely view the
EITC as beneficial to the country.
Though the EITC program could be described in a briefing on its own,
a quick overview of the program will be beneficial for NEC members. At
the most basic level, the EITC gives tax credits, essentially cash, to low- and
middle-income working families. The EITC differs from other anti-poverty
programs in that up to a certain level of income, the benefits increase as the
family makes more money. At a certain level, benefits will plateau, as more
income will not earn more benefits. Finally, after a certain income
threshold, benefits start to decrease until the benefits disappear. However,
the initial escalating benefit structure of the EITC encourages people to
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work and to work harder. The amount of benefits given out also depends
on whether the individual is married or single and on the number of
children. Benefit levels increase with the number of children, up to a total
of three children. Those that are married have a longer plateau than those
that are single, allowing workers in the former situation to enjoy maximum
benefits at higher incomes.
One area for expansion for the EITC is in its treatment of families
without any children. For instance, a married family of four with a
household income of $40,000 would have received $1758 in EITC benefits
in 2013 while a married family of two with a household income of $20,000
would have received no EITC benefits. As of 2013, the highest EITC
amount that a married couple with no children was eligible for was just
$487. Raising the EITC amount for those with no children could be a
possible substitute for raising the minimum wage.
QUESTIONS FOR POLICYMAKERS
For minimum wage, the solutions are quite simple but the issue itself is
not. As a member of the NEC, you must tread carefully, considering all the
competing academic evidence as well as the division between liberals and
conservatives on this issue. Does raising the minimum wage really help the
poor? How significantly does it affect employment levels? Would the EITC
be a better vehicle to raise people out of poverty? If employment levels are
affected, what is the right balanced between those that are helped by the
minimum wage increase and those that are laid off?
CONCLUSION
3.6 million workers are paid at or below the minimum wage in the
United States. While that represents only about 1% of the US population,
many more live as children of parents who work minimum wage jobs. For
more than five years, the minimum wage has remained at $7.25 as inflation
slowly erodes away its value. With this stagnation have come labor protests
across the country. States and cities have moved forward with their own
proposal to change their own minimum wage laws. The federal government
must make a choice whether to join these states and raise the minimum
wage. Action could mean a hit on the economy and employment levels
while inaction could lead to more and more impoverished workers. The
NEC must chart the best future path for the federal minimum wage.
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GUIDE TO FURTHER RESEARCH
Delegates should do their own research into the minimum wage
structure in the United States. Though this briefing mentioned a couple of
studies that analyzed the potential economic effects of a minimum wage
increase, a considerable number of other papers and studies exist that look
more closely at the issue. Take note of any news articles that mention states
or localities that are considering minimum wage increases.
If delegates are even more ambitious, read articles about the Earned
Income Tax Credit. Though not the focus of this briefing, knowledge of the
EITC could come in handy in producing a reform package that would
increase the minimum wage by less than that recommended by liberals but
at the same time expanding the EITC.
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SAN FRANCISCO 2015
THE FEDERAL MINIMUM WAGE
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