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Policy Feature Issue: State of the Union – The President’s “Year of Action,” The Economic Impact of Minimum Wage Increases

Policy • January 27, 2014

As the economy continues to struggle to create jobs and improve economic opportunity, the Administration continues to push an increase in the federal minimum wage.  Legislation has been introduced in both the House and the Senate to raise the federal minimum wage from $7.25 to $10.10 per hour.[1]  Yet, what these proponents fail to talk about is how little a federal minimum wage has done to create jobs or improve the quality of life for our nation’s working poor.  Rather, federal minimum wage increases have historically served as a disincentive to hiring, have led to wage increases among individuals in households above the poverty line, and have done little to help those who live in poverty.  Moreover, there are other ways to increase wages such as eliminating unnecessary regulations and improving economic growth.

Background:

In 1938, Congress enacted the Fair Labor Standards Act (FLSA), which established a general minimum wage that must be paid to all covered workers.[2]  The FLSA mandates broad minimum wage coverage, while establishing certain categories of workers who are not covered by FLSA wage standards.[3]  The Wage and Hour Division (WHD) within the Department of Labor was created to administer and enforce the FLSA.[4]

The FLSA established a minimum wage of 25 cents an hour in 1938.  Since then, the federal minimum wage has been increased 22 times.[5]  The most recent adjustment occurred in 2007, when the minimum wage was increased from $5.15 per hour to $7.25 per hour.[6]  In 2009, a U.S. Department of Labor report estimated that 84 percent of the workforce (130 million workers) was covered by the FLSA.[7]

Facts You Need to Know:

  • Currently, the federal minimum wage stands at $7.25 per hour.[8]  A 2012 BLS report estimated that 75.3 million workers in the United States were paid at hourly rates, representing 59 percent of wage and salary workers.[9]  1.6 million of these hourly workers received exactly the prevailing federal minimum wage, and 2 million received pay below minimum wage.[10]  These 3.6 million workers represent only 4.7 percent of total hourly paid workers.
  • More importantly, only a small portion of the working population that would benefit from a minimum wage increase live in poor households.  A 2010 study found that only 11.3 percent of workers who would gain from a federal wage increase to $9.50 per hour live in poor households.[11]
  • The study found that “of those who will gain, 63.2 percent are second or third earners living in households with incomes twice the poverty line, and 42.3 percent live in households with incomes three times the poverty line.”[12]
  • Moreover, evidence to suggest minimum wage increases drastically lower poverty rates is unsubstantiated.  The same study found, after an analysis of state-level minimum wage increases, that there was “no evidence that minimum wage increases between 2003 and 2007 affected overall state poverty rates.”[13]
  • Minimum wage increases also have a negative effect on the labor market.  A 2007 analysis of 33 reports studying the effect of minimum wage increases on unemployment found that 28 of the reports (85 percent) estimated that minimum wage increases had negative employment effects.[14]  The Heritage Foundation has estimated that a minimum wage increase to $10.10 would “likely eliminate 300,000 jobs per year and reduce gross domestic product (GDP) by over $40 billion annually.”[15]  Other analysis suggests “Lower-bound elasticity estimates imply job losses of 467,000 to 1.40 million, while upper-bound estimates imply job losses of approximately 3 million to 4 million.”[16]


[1] James Sherk and John L. Ligon, Unprecedented Minimum-Wage Hike Would Hurt Jobs and the Economy, Heritage Foundation (Dec. 2013).

[2] David H. Bradley, The Federal Minimum Wage: In Brief, Congressional Research Service (May, 2013), p. 1.

[3] Id. at 1. Note: The FLSA allows the payment of subminimum wage for certain classes of workers, such as youth under the age of 20 (for 90 days), full-time students, individuals with disabilities, and workers who receive tips.  See Id. at  4.

[4] Id. at 1.

[5] Id. at 1.

[6] Id. at 1.

[7] U.S. Department of Labor, Wage and Hour Division, Coverage Under the Fair Labor Standards Act (FLSA), Fact Sheet #14, Washington, DC (July, 2009), p. 1.

[11] Joseph J. Sabia and Richard V. Burkhauser, Minimum Wages and Poverty: Will a $9.50 Federal Minimum Wage Really Help the Working Poor?, Southern Economic Journal 76.3 (2010), p. 602.

[12] Id. at 602.

[13] Id. at 600.

[14] David Neumark and William L. Wascher, Minimum Wages and Employment, Foundations and Trends in Microeconomics 3.1 (2007), p. 164.

[15] James Sherk and John L. Ligon, Unprecedented Minimum-Wage Hike Would Hurt Jobs and the Economy, Heritage Foundation (Dec. 2013).

[16] Sabia and Burkhauser, Minimum Wages and Poverty, p. 606.

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