Five Questions on the Minimum Wage

Assistant Professor Elizabeth Rigby breaks down the basics of the minimum wage debate.

The federal minimum wage is currently set at $7.25.
September 11, 2013

By Brittney Dunkins

Debate about the minimum wage, both at the federal and state level, has been growing since President Obama proposed to raise the minimum wage from $7.25 per hour to $9 per hour during his State of the Union address in February.

Since then, the topic has continued to surface from nationwide service worker strikes this summer to recent state-level increase proposals in D.C.’s backyard. The concerns at stake are complex and involve the potentially unequal matchup between the cost of living and the minimum wage. Though some states have instituted a “living wage,” to counteract the disparity, less than half of all states have a living wage that is higher than the federally mandated minimum wage.

 The central question of the debate is whether public outcry will gain real traction where it’s needed to effect change—in Congress.

Given the many issues at play, George Washington Today talked to Trachtenberg School of Public Policy and Public Administration Assistant Professor Elizabeth Rigby to review the basics of the minimum wage debate.

Q: What is the minimum wage?
A: The minimum wage is the lowest amount that most employers can pay their employees. It is set at the federal level in a process involving both the president and Congress, though states may opt to further increase the minimum wage in their state.

Q: Who are the key players in the debate?
A: At both levels of government, this is an important issue for anti-poverty advocates who are working to promote policies that “make work pay” for American families, or allow a parent working full time to earn enough money to raise his or her family above the poverty line. It is also an important issue for small business and employer associations who worry that an increase in the minimum wage will cut into their profit margin and threaten their ability to operate.

Q: How does living on the minimum wage differ across the U.S in relation to cost of living?
A: It is important to distinguish between the official minimum wage and a living wage. The minimum wage is set at $7.25 by the federal government but is higher in 19 states and D.C., with the highest minimum wage set at $9.19 in Washington state.
A living wage is calculated so that someone working 40 hours a week and spending no more than 30 percent of his or her income on housing can afford basic rental housing, food, clothing, utilities and access to health care. This higher living wage averages about $13 in the U,S.—but varies dramatically across the states primarily due to differences in the cost of housing.

Q: How would an increase in the minimum wage affect the economy?
A: This is a long-debated question in social science literature. A good deal of research, including an often-cited study by economists David Card and Alan Krueger examining the effect of a minimum wage increase in New Jersey and comparing communities inside and outside of the state border, finds no negative effects of minimum wage increases.

Yet, some other studies show small but consistent trade-offs between higher minimum wages and lower employment, often via lay-offs. It is important to note that these effects are only examined for the range of minimum wages we currently experience. It is likely that a much higher minimum wage, one that is closer to the living wage recommendation, would be more disruptive to employers and likely have more negative impacts.

This conflicting research indicates that a modest increase in our current minimum wage would have little negative effect on the overall economy, if any negative effect at all, while providing greater economic resources for most families living below or near the poverty line.

Q: Is it likely that Congress will move on this issue? Why or why not? If they do, what action would it take?
A: It is unlikely. Research on state-level policymaking suggests that the minimum wage is rarely increased during recessions or other bad economic times. In addition, due to polarization and gridlock in Congress compounded by the other pressing issues on the agenda during the final days of the session, action on the minimum wage would likely require strong presidential leadership. Although it is true that President Obama has been speaking about the minimum wage more often, particularly as compared with his first term, it doesn’t seem to be a high enough priority to overcome the economic and political barriers in place at this time.
As a result, the minimum wage will continue to erode in value. This effect is because of a very important trait of our current minimum wage policy in which the wage is not indexed, or linked, to inflation. Subsequently, it can only be increased by legislative action. And in the absence of policy changes to increase the minimum wage, its real value continues to decline as inflation rises each year.