Government Policies & Programs

Why the Federal and State Governments Should Both
Increase and Index Their Minimum Wages

Frank J. Mauro

Fiscal Policy Institute

September 1999

The first minimum wage at the federal level was signed into law in 1938, after several states including New York had enacted their own minimum wage laws. The U. S. Supreme Court had first invalidated such state laws as violating the liberty of contract and then upheld them as a proper exercise of the states' power to protect the public health, safety and welfare. From the very beginning, such laws protected responsible employers from the pressures that could be brought to bear by unscrupulous competitors while ensuring that all workers received some minimally acceptable level of compensation. Unfortunately, the level of the minimum wage, particularly in New York State, has been allowed to decline to a level at which it is unable to serve as a meaningful floor under the low wage job market. On economic, social and moral grounds, it is essential that the minimum wage, at both the federal and state levels, be increased and indexed to changes in an objective measure such as the Consumer Price Index or Average Hourly Earnings.

Some workers are covered by both the federal and state minimum wages (and are thus protected by whichever of the two happens to be higher at a particular point in time), while others are covered by one but not the other, and some by neither. The federal minimum wage reached its high point in terms of purchasing power on February 1, 1968 when it and the state minimum wage were both increased to $1.60 per hour.

In July 1999 dollars, this would be the equivalent of a $7.80 per hour. (The New York State minimum wage reached its all time high in purchasing power on July 1, 1970, when it was increased to $1.85 per hour, the equivalent of $7.91 in July 1999 dollars.)

A job at those wage levels made it possible for a worker to get his or her feet on the ground, to support a family and to lay the foundation for a better future. In the 1960s and 1970s, the earnings of a full-time, year-round worker receiving the minimum wage were enough to lift a family of three above the poverty line. That is no longer true. Despite the increase of the federal minimum wage to $5.15 per hour on September 1, 1997, a person working full-time, year-round at that level will earn only 72% of the poverty line for a family of three, and have less than two-thirds of the purchasing power of a similar worker in 1968.

At the state level the situation is even more egregious, where New York's minimum wage is $4.25, more than 17.5% below the federal minimum. Ever since New York moved to a single minimum wage in 1960, our state's governors and legislatures have almost always moved to increase the state minimum wage in tandem with changes in the federal minimum wage. Yet, for some unexplained reason, New York has not conformed with the 1996 (to $4.75) and 1997 (to the current $5.15) increases at the federal level. This is, by far, the longest period of time that New York has ever gone with a minimum wage below the federal minimum. In fact, over the course of the last 25 years, New York has on only one other occasion (in 1978, for nine months) lagged behind the federal government in increasing the minimum wage. In fact, during two periods in the late 1960s and early 1970s (the first lasting 13 months and the second almost four years), New York maintained a minimum wage above that of the federal government.

This situation is even more difficult to explain when one compares New York to other high wage states. Of the ten states with average weekly wages above the national average, New York is the only state with a minimum wage below the federal minimum. Four of the other high wage states (Illinois, Maryland, Michigan and New Jersey) have minimum wages that equal the federal $5.15, and five have higher minimums (Alaska, $5.65; California, $5.75; Connecticut, currently $5.65 and going to $6.15 on January 1, 2000; Delaware, currently $5.65 and going to $6.15 on October 1, 2000; Massachusetts, currently $5.25, and going to $6.00 on January 1, 2000, and $6.75 on January 1, 2001). The state minimum wage is also higher than the federal in Oregon ($6.50), Vermont (currently $5.25 and going to $5.75 on October 1, 1999) and Washington (currently $5.70, going to $6.50 on January 1, 2000, and being adjusted for inflation based on the CPI on January 1, 2001 and annually thereafter.)

Contrary to the conventional wisdom, most minimum wage workers are adults working full-time, and increasing the minimum wage by reasonable amounts (such as the four most recent increases that were all in the 40 to 50 cent range) neither reduced employment nor fueled inflation. The 1999 Economic Report of the President noted that, based on the many studies that have examined the issue, the "weight of the evidence suggests that modest increases in the minimum wage have had very little or no effect on employment". Evidence of recent years, particularly the studies by economists David Card and Alan Krueger, also refutes the claim that state level minimum wage increases above the federal standard reduce employment.

The "flow of funds" criticism of a minimum wage increase - that businesses will only be able to comply with increases in the minimum wage by increasing prices or reducing employment - ignores two other key variables: corporate profits and executive compensation. It also ignores the very reality that make the need for restoring the value of the minimum wage so important at the present time: Our economy is experiencing substantial productivity-driven increases in total income but the resulting gains in prosperity are not being broadly shared.

Both the federal government and New York State should increase their minimum wages to levels that will ensure that these wage floors can do their job. Restoring the purchasing power of the minimum wage to its late-1960s level would require a higher minimum wage (something in the range of $7.65 per hour) than the Congress or the State Legislature is going to implement overnight. On the other hand, if legislation were enacted to increase the minimum wage to that level in several "reasonable" steps, its value would be eroded by inflation by the time it was implemented. An attractive alternative would be to establish a target minimum wage of $7.65 an hour, to adjust that target annually for inflation, to increase the actual minimum wage by a fixed amount, say fifty cents per year, until it reaches that moving target, and thereafter to have the actual minimum wage equal the target. Consideration should also be given to the possibility of indexing the target minimum wage to changes in average hourly earnings rather than to a measure of inflation such as the Consumer Price Index. Such an approach would have the advantage of ensuring that low wage workers share in the overall income growth being generated by productivity improvements. Indexing on the basis of changes in the Consumer Price Index, on the other hand, has the advantage of familiarity since it is used in many state and federal laws.