As the American economy continues to recover, there are many proposed changes that are supposed to better the nation. One recent proposal that warrants further discussion is raising the federal minimum wage. The federal minimum wage is currently $7.25 an hour and was last raised in 2009. The $7.25 minimum wage in 2013 is 21 percent below its value in 1968 when adjusted for inflation.

The federal minimum wage was first introduced in 1938 when President Franklin Roosevelt signed the Fair Labor Standards Act. The only way to change the federal minimum wage is through Congressional legislation. While minimum wage legislation has been passed numerous times over the years, the minimum wage has failed to keep up with an often increasing cost of living in the United States.
A minimum wage employee working full-time (40 hours per week & 52 weeks per year) earns an annual income of $15,080. According to the Census Bureau, the poverty threshold for a three person family (1 adult and 2 children) is $18,498. Clearly, a full-time minimum wage job cannot keep a three person family out of poverty. People who work full-time should not have to worry about not being able to feed and take care of themselves or their children.

The Economic Policy Institute (EPI) constructed the “basic family budget” or the amount of money a family needs to feed, shelter, and clothe itself, get to work and school, and subsist in 21st century America. For a single parent with two children, the basic family budget is $40,273. That is almost triple the amount a full-time minimum wage worker earns. This number is significantly higher than the Census Bureau’s poverty threshold.

A low minimum wage doesn’t just affect workers, but also the children that rely on their parents to provide for them. The child poverty rate in America currently stands at 22 percent; its highest level in 20 years. Effects of child poverty are extremely damaging, especially to children’s health, nutrition, education, housing, safety, and future earnings. When looking at child poverty today, low paid work is as significant as unemployment. Lisa Dodson from Boston College, and Randy Albelda of UMASS-Boston, wrote a paper in 2012 titled How Youth Are Put at Risk by Parents’ Low-Wage Jobs. According to the paper, youth in low-wage families are more likely to drop out of school, become obese, and become parents during their teen years.

There are various ways to go about increasing the federal minimum wage. Proposals have been introduced by a wide variety of people, ranging from President Obama, to economists and academics across the country. Recent bills in the House, introduced by Rep. George Miller, and in the Senate, introduced by Sen. Tom Harkin, have called for a gradual raise in the minimum wage from $7.25 to $10.10, concluding in 2016 by indexing it to inflation going forward. If this legislation were to be passed, over 30 million Americans would see a raise, and an estimated 18 million children would have parents who will get a raise.

The Federal Reserve Bank of Chicago has found that a $1.75 raise in the federal minimum wage (making it $9 per hr.), as proposed by President Obama in his 2013 State of the Union address, would raise the real GDP by 0.3 percentage points in the short run. Additionally, they found that the $1.75 raise would have virtually no effect, positive or negative, on real GDP in the long run. Economists have tirelessly studied the effects that a higher minimum wage has on employment, and the best research shows that minimum wage increases have minimal, if any, effects on employment. The federal minimum wage has been increased 22 times since the 1930s, and it has yet to destroy the American economy.

Heidi Shierholz of EPI proposed in a 2009 paper that the federal minimum wage should be indexed to 50% of average wages. While a popular proposal is indexing the minimum wage to prices, or adjusting for inflation annually, Shierholz points out that this means the real minimum wage never changes. She states that indexing the minimum wage to average wages is the only way to ensure that a relative living standard would be maintained.

Besides lifting millions of workers and families out of poverty, one of the main arguments for raising the minimum wage is that it would boost the American economy by significantly increasing household spending. Minimum wage workers, who have a high propensity to spend, would only add to the gross domestic product (GDP) with increased household spending. On the other hand, those against the raise of the federal minimum wage argue that these extra costs on employers would mean less jobs and higher prices, thus creating a negative effect on the US economy. As discussed above, this argument does not seem to hold true.

According to the Brookings Institute, President Obama’s plan to raise the federal minimum wage to $9 would only cause about a 7% increase in household earnings for those households that they classify as “bottom-third households” (defined as a household in the bottom third of income distribution). While this may not seem like much, it is still an increase that would make work pay more for lower income families and help ensure parents can more adequately support their children. With the minimum wage at its current level, low wage workers and their families are often forced to supplement their earnings with public assistance support from food stamps or tax credits in order to make ends meet. These programs do so successfully and in combination, keep millions of children from poverty each year. For example, the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) lifted 4.9 million children out of poverty in 2011. But a higher minimum wage would ensure more workers could provide for their families through their earnings alone. Current minimum wage workers would not be the only ones to see a raise if the minimum wage were increased. Many workers just above the new minimum wage would also be likely to see an increase in household income.

According to Gallup, 71 percent of American adults are in favor of raising the federal minimum wage to at least $9 per hour. The current $7.25 per hour minimum wage is not enough to provide a decent standard of living in the United States. More importantly, it is having lasting negative effects on our nation’s youth.

For more information on the impact of raising the minimum wage, please check back each day this week. We will have a post from Heidi Shierholz, economist at Economic Policy Institute, on Tuesday, followed by a joint post Wednesday from Randy Albelda at the University of Massachusetts Boston’s Center for Social Policy and Lisa Dodson at Boston College. Thursday we will have a contribution from Mary Kay Henry, International President of the Service Employees International Union. Friday we will have an infographic breaking down the key figures of the minimum wage debate.