According to the Living Wage Calculator, an Increase in the Minimum Wage Won’t Offset Rising Inequality in America

By Dr. Amy K. Glasmeier
Poverty in America Project, Penn State, 7/26/07

Tuesday’s announced change in the minimum wage will not offset the effects of a decade-long increase in income inequality and a diminished ability to locate decent housing at affordable prices. The minimum wage increases by 70 cents, to $5.85/hour––the first increase in a decade. While it ends the longest span without a federal minimum wage increase since the pay floor was enacted in 1938, it will have little effect on the rising costs of goods or services. According to estimates, the minimum wage would have to increase to at least $9.00/hour before low-wage workers would see a serious change in their material circumstances. For a nation as rich as ours, the $.70/hour increase, though sorely needed, is simply not enough for America’s working poor families.

The federal minimum wage, established in 1938 as part of the Fair Labor Standards Act, was $.25 cents/hour. Today’s increase to $5.85/hour is the 26th since its inception. The last previous increase came in September 1997, when President Bill Clinton signed a bill raising the minimum wage to $5.15/hour, an increase of $.40.

This is the first of three year-over-year increases stemming from legislation signed by President Bush in May 2007. Through this legislation, the minimum wage increases 70 cents each summer until 2009, when all minimum-wage jobs will pay no less than $7.25/hour.

While the increase in the minimum wage is good news for many Americans, it does little to diminish the growing number of persons who are working and still poor. The minimum wage calculator on this website has been adjusted to reflect this federal wage increase. The results for most places indicate that the rising costs of housing, health care, and transportation for the most part negate the effects of this change.

Why? First, the increase in the minimum wage really only improves a person’s effective purchasing power by about $.30/hour. If the minimum wage were linked to the dollar’s real purchasing power, according to a 2006 Congressional Research Service Report, it would already have reached $9.05 prior to the increase. The effective purchasing power of a person earning the minimum wage of $5.15/hour today, given inflation, was only $3.93 in 1996 dollars anyway (the last time the minimum wage was increased). In fact, according to researchers at Oregon State University, the purchasing power of the minimum wage is at a 50-year low. To maintain the purchasing power of the minimum wage, which was last set in 1996 at $5.15/hour, a person would have to work an additional 20 minutes to make up for the effects of inflation.

Still, the increase in the minimum wage lifts as many as 1.7 million people who earned the minimum wage out of poverty. A person working 40 hours per week at the current minimum wage of $5.15 makes about $10,700 a year. The federal poverty level for singles is $10,210; couples, $13,690; and for families of three, $17,170. A raise to $5.85/hour would increase that income to $12,168/year before taxes. An increase to $7.25 would boost that to just over $15,000/year. Keep in mind that according to the living wage calculator, poverty-level income is insufficient to cover basic costs. Thus, while an increase in the minimum wage changes a person’s or family’s income, it does not guarantee their ability to purchase needed goods and services.

The first of three incremental increases that will lift the minimum wage to $7.25 in July 2009 will directly affect 5.3 million workers. Millions more also will benefit as employers invest in workers’ skills to improve their productivity, thus offsetting the effect of the wage increase. At least that is what theory would suggest.

Business leaders recognize the need to have a functioning, healthy, and engaged workforce. And while some business leaders complain about the impact of the wage increase on their bottom line, others know that people paid the minimum wage are not earning sufficient income to take care of one person, much less a family of four––two adults and two children.

As Mike Kelly of Cox New Service reports, “Employers in businesses such as Costco and Addus Health Care are among those claiming that a raise in the minimum wage will not hurt their businesses’ bottom lines. According to Small Business Majority, a coalition of U.S. small business owners, two out of three small business owners nationwide supported the minimum wage increase.” Referenced in the July 24th Centre Daily Times, Kelly goes on to say: “Most business leaders recognize that we need to focus our energies in building a strong, competitive 21st century economy that creates the jobs of the future.” According to John Arensmeyer, CEO of the Small Business Majority, “A minimum wage that promotes stability and economic prosperity is a necessary component of progress.”

Minimum wages are just that––a minimum. They were established at a time when the nation sought to raise up the living standards of the nation’s working families by putting a floor under minimum wage rates. What does the minimum wage mean today; what role does it play in a high-skill economy? Rather than allowing its workers to compete at the low end of the pay scale, America needs to take the high road and prepare workers for the future by paying families wages that make possible debt-free college educations, affordable healthcare, and housing choices for today’s young adults. Isn’t that what it is all about in the end?

http://www.povertyinamerica.psu.edu/2007/07/26/according-to-the-living-…’t-offset-rising-inequality-in-america/