Flawed Premise Behind Minimum Wage Bill

There’s a very simple supporting argument behind Rep. Jesse Jackson Jr.’s proposal to raise the federal minimum wage to $10 an hour from $7.25.

It is this: Inflation is eating into wages, so much so that the Democrat from Illinois says the federal minimum wage would be above $10 an hour today anyway, if it were adjusted for inflation since 1968. (Too bad that same reasoning isn’t used to inflation-adjust our tax brackets, as more middle class people get shoved into higher brackets not adjusted for inflation by the day, but that is for another day.)

Anyway, that’s why the bill is called the "Catching Up to 1968 in 2012" Act.

“But it's a flawed premise,” says Michael Saltsman, research fellow at the Employment Policies Institute, a free-market think tank in Washington, D.C. “If the minimum wage had been linked to inflation since it was first created in 1938, it would only be about $4 an hour today.”

How so?

“Because indexing the minimum wage cuts both ways -- inflation can rise, but it can also fall, which means the minimum wage could rise and fall as well,” says Saltsman, who previously worked as a field economist at the Bureau of Labor Statistics. “Rep. Jackson, of course, just wants it to rise,” he adds.

Saltsman did the analysis, using the BLS’s inflation calculator going back to 1938. So why pick 1968?

“Perhaps Rep. Jackson just picked 1968 because it gives him the best number for his bill,” says Saltsman. The Congressman “selectively used dates to achieve the highest wage possible for the bill.”

There’s another problem with the bill, Saltsman says: It also overlooks the crucial fact that the vast majority of the people who earn the minimum wage aren’t stuck there; two-thirds earn a raise in their first 12 months on the jobs, according to a study by economists Bill Even at Miami University and David Macpherson at Florida State University, who now works for Trinity University.

Saltsman points out that the study says: “Over the 23 years of data studied in the report, nearly two-thirds of minimum wage employees who continue employment are earning more than the minimum wage within 1–12 months.”

That’s backed up by another study published in the Labor Department’s Monthly Labor Review, which found that the vast majority of people who work at the minimum move beyond it, Saltsman notes.

Saltsman adds: “There’s an interesting bit of history here, too,” meaning, there are good reasons why the minimum wage stayed low. It’s because of the type of worker getting the wage -- the skill of the job has kept the minimum wage low, too.

Specifically, the federal minimum wage “used to be a higher wage floor for relatively more skilled employees, in industries like mining and manufacturing,” he says.

However “amendments over time to the Fair Labor Standards Act expanded the minimum wage to cover more lower-skilled workers by the late 1960s in service-oriented sectors who tend to get paid less anyway, like gas stations, movie theaters, restaurants.”

So, “after that, Congress allowed the relative value of the minimum wage to fall with respect to the type of businesses covered,” Saltsman says.

Saltsman says “You know the story: If you’re a service business (e.g. restaurant or retailer),   you’re hiring people with less experience and lower productivity, and a wage that’s set too high is going to inhibit hiring.”