Wisconsin's Minimum Wage Debate

Here we are again debating a variety of issues created from the statements made by the governor in his state of the state address. Over the next few months, his entire speech will be dissected, analyzed and responded to over and over again. The first issue I want to open is that of the minimum wage.

It is currently set at $7.25/hour and the Democrats in the state legislature have introduced proposals to raise it to $10.10/hour, state wide. No one thinks that the Republican majority will pass such a bill and it is permanently locked up in committees and subcommittees, much to the Democratic members' chagrin. Governor Walker briefly addressed the proposal in the state of the state and came firmly out against it. His stated reason for rejection was that it would be too costly and would suppress entry level positions and weaken continued job growth..

One of the sources I used to research this blog article was the CRS Report for Congress, Prepared for Members and Committees of Congress, titled Inflation and the Real Minimum Wage: A Fact Sheet, Craig K. Elwell, Specialist in Macroeconomic Policy, September 12, 2013. In this report he tracked the minimum wage from its inception in 1938 through September of 2013. His report outlined the following:

“Inflation and the Real Minimum Wage: A Fact Sheet

Congressional Research Service

1

he Fair Labor Standards Act (FLSA) of 1938 established the hourly minimum wage rate at

25 cents for covered workers.

1

Since then, it has been raised 22 separate times, in part to

keep up with rising prices. Most recently, in July 2009, it was increased to $7.25 an hour.

Because there have been some extended periods between these adjustments while inflation

generally has increased, the real value (purchasing power) of the minimum wage has decreased

substantially over time.

The Real Minimum Wage

The minimum wage is not indexed to the price level. It has been legislatively increased from time

to time to make up for the loss in its real value caused by inflation. In nominal (current dollar)

terms, the minimum wage has risen steadily from 25 cents to $7.25 an hour, where it has

remained since its effective date of July 2009. As the legislated adjustments to the minimum wage

standard have occurred at irregular intervals—sometimes increasing annually, other times not for

several years—while prices have generally risen each year, the purchasing power (real or constant

dollar value) of the minimum wage has varied considerably since its enactment.

For each time the minimum wage was changed, it represents nominal and real value. The inflation adjustments to the minimum wage are

made using the Consumer Price Index for Urban

Wage Earners and Clerical Workers (CPI-W). Real values of the minimum wage are expressed in

terms of July 2013 dollars, the latest month for which the index is available at the time of the fact

sheet’s preparation. Data on average hourly earninngs in nominal and constant (July 2013) dollars

are displayed for comparison purposes. The last column of the table shows levels of the CPI-W

since the inception of the federal minimum wage. The U.S. Bureau of Labor Statistics calculates

the earnings series

2

and the CPI-W.

3

The peak value of the minimum wage in real terms was reached in 1968. To equal the purchasing

power of the minimum wage in 1968 ($10.77), the current minimum wage’s real value ($7.90)

would have to increase by $2.87 (or 36%). Althoug

h the nominal value of the minimum wage was

increased by $5.65 (from $1.60 to $7.25) between 1968 and 2009, these legislated adjustments

did not enable the minimum wage to keep pace with the increase in consumer prices, so the real

minimum wage fell.

In addition to comparing the rate of increase in the minimum wage with prices, the level of the

minimum wage also has been compared with the

average hourly earnings of most workers in the

private nonfarm economy—which also peaked in 1968 at 54% (see footnote a in the table). In no

other year did the minimum wage exceed half of average hourly earnings. The legislated

adjustments that occurred after 1968 resulted in the minimum wage ranging from 34% to 47% of

average hourly earnings.

1

For the minimum wage’s legislative history and other information on the labor standard, see CRS Report R42713,

The

Fair Labor Standards Act (FLSA): An Overview

, by Gerald Mayer, Benjamin Collins, and David H. Bradley.

2

The earnings series are available at http://stats.bls.gov/ces/home.htm#tables.

3

The CPI is available at http://stats.bls.gov/cpi/data.htm.”

From a CNN Money Report: http://economy.money.cnn.com/2013/02/14/minimum-wage-history/

“When President Franklin D. Roosevelt first created the minimum wage in 1938, it was 25 cents. Adjusted for inflation, that would be worth $4.07 today.

The minimum wage had its lowest buying power in 1948, when it was worth about $3.81 in today's dollars. It had its highest buying power in 1968, when it was worth about $10.56.

At $7.25 in 2012, our current minimum wage is in the middle of those two extremes.

President Obama's proposal to raise the minimum wage to $9 would put it back to a value last seen in the early 1980s.”

Again the relative and true worth of the minimum wage is declining.

It doesn't take a financial genius to figure out that the minimum wage has a long way to go before it becomes a contributor to increasing inflation and reigniting the 'wage price spiral'.

In practical terms, how does the current minimum wage impact employment numbers? I'm going to use a real world example.

I personally know someone who is earning around $25 K a year. They are currently limited to minimum wage jobs, but they work three of them to earn that annual figure. An average week for them is somewhere around 50 to 65 hours per week. They suffer increased illness; they are always stressed and they are barely making it. They will now be able to afford healthcare insurance through ACA. They were one of those people that were forced to use the emergency room on a too often basis.

I recently was talking with the individual about what impact a raise in minimum wage to $10.10/hour would have on them. The answer was simple; they could quit one of the three jobs they are currently doing. Let's take this to the next logical step.

This person is not unique, many are working under these same type of conditions. If enough of the currently employed at minimum wage drop one of their jobs, then it will, in fact, open enough positions for new workers to enter the workforce and stimulate the economy even more Thus, debunking the governor's basic supposition.

Also, by raising the minimum wage to $10.10/hour in Wisconsin, it would distribute more money to more people increasing the potential for more consumption. Another benefit would be to move more people away from government funded programs, thus providing tax payer relief.

Even though raising minimum wage would make fiscal and social justice sense, businesses that depend on the lower minimum wage to put to their bottom lines will fight it 'tooth and nail' claiming it will cost their businesses. My answer to that is that every business that employ minimum wage workers are in the same boat and no one business will gain an advantage over another. In addition, they may have to raise the price of their product or services, but that is a fiscal reality and the consumer will adjust. The consumer has adjusted just fine when the price of food, fuel and other consumables have risen. Therefore, there will be a minimum impact on current and future businesses. The final argument for raising the minimum wage has to do with retaining the people that we have educated.

If more people are working and staying in Wisconsin, then it will increase revenues, without having to increase social program funding. So the principle of 'work over handout' is reinforced and society benefits.