Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



A $10.10 Minimum Wage Might Not Be High Enough

The minimum wage has been one of the hottest topics in politics this year, thanks to a concerted publicity effort from President Obama and other liberal leaders. The new minimum many of these leaders target is $10.10 an hour, which would push the real value of minimum-wage work close to all-time highs set almost half a century ago:

Source: U.S. Department of Labor. Adjusted with Consumer Price Index for Purchasing Power.

Many writers (myself included) have shown that the value of the minimum wage, beyond falling in real terms for decades, has also lost purchasing power against a broad basket of important expenses, and is weaker in relation to most other American workers than it has been for many years.

Raising the minimum wage to $10.10 by 2016 would do much to fix that weakness, but there are also widespread fears -- including some voiced by the Congressional Budget Office -- that raising the minimum wage would actually cost more American jobs than it benefits. The CBO's recent report projects a loss of 500,000 jobs should the minimum wage be raised to $10.10, even though the same report indicates that another 900,000 people would be lifted out of poverty. The benefit of higher wages for some might not outweigh the cost of so many additions to the safety-net rolls.

But is $10.10 really enough? Might it even be too much? That depends on a number of factors. For example, you'll occasionally hear that the minimum wage should simply be pegged to inflation. This is trickier than it sounds on the surface, because the starting point for our inflationary peg matters a great deal, especially if we want to start with the nominal minimum wage in effect at that point. This chart illustrates the problem with that argument:

Sources: U.S. Department of Labor and St. Louis Fed.

The starting rate of the minimum wage matters a great deal. If the minimum wage had simply been pegged to inflation (by tracking the Consumer Price Index) from its inception, it would be more than 40% lower today than it actually is because the very first minimum wage was so small. However, if the minimum wage began to track inflation after its postwar boost to $0.75 an hour -- the largest percentage increase in its history -- it would end up paying out about $7.44 an hour today. As you can see, that particular peg would have kept the minimum wage growing at very much the same pace as it actually has through legislation.

Things get interesting when we start pegging the minimum wage to inflation during its glory days. By starting our final inflationary peg in 1968, when the minimum wage was raised to $1.60 an hour (when adjusted for inflation, this is still the highest real minimum wage), we wind up pushing it well above its historical norms. And at a current rate of $10.90 an hour, that minimum wage tracks rather closely with what many Democrats are working for today, and makes an argument that $10.10 is too low, as inflation will almost certainly push the rate higher by 2016.

But if we force the minimum wage to track only certain components of the CPI, the picture again changes in important ways. We all know that health care costs have soared in our lifetimes, but what about rent? These are two of the most important components of any family's budget, and they present dramatically different pictures of inflation:

Sources: U.S. Department of Labor and St. Louis Fed.

Pegging the growth of the minimum wage to the rise in medical care spending -- which is calculated as the average urban American's out-of-pocket expense for doctor visits, hospital stays, prescription drugs, and so on -- again brings us to a level close to the $10.10 an hour now being pushed by many Democrats. But tracking rent costs gives us our lowest rate yet. However, the starting point again matters a great deal. If we begin our medical and rent pegs in 1968, today's minimum wage really starts to look inadequate:

Sources: U.S. Department of Labor and St. Louis Fed.

It's probably not realistic to peg the minimum wage to the growth of medical costs, but when we start tracking the rise of rents in 1968, we again find that the new $10.10 target is very close to what the minimum wage would be today if it simply followed the course of an essential expense.

Other economic measures continue to support the argument for a $10.10 minimum wage. The average monthly household income has actually surpassed the growth of inflation over time from all three starting points:

Sources: U.S. Department of Labor and St. Louis Fed.

There's not a great deal of difference between starting in 1938, 1950, or 1968. The highest adjusted minimum wage under this calculation is $12.93 an hour, which is reached from the 1950 starting point. A 1968 starting point produces an adjusted minimum wage of $12.02 an hour, so it does appear that there are some measures where even $10.10 an hour falls short.

It's important to distinguish between the average household income, which can be skewed by high earners, and the more popular median household income, which simply looks for the midpoint of American earning power, and which wasn't tabulated until years after the minimum wage became law. But since the average household income was roughly 10% higher than the median household income in 2012, this only serves to drop our new middle-class-adjusted minimum wage to about $10.50 an hour -- again, roughly in line with the higher rate liberal politicians are trying to implement.

Every now and again you'll hear someone argue that the minimum wage should be raised to reduce inequality between the richest and poorest Americans. However, if we treated America's poorest like America's richest, then the minimum wage might be a bit unsustainable:

Sources: World Top Incomes Database and U.S. Department of Labor.

In the typical 40-hour, 50-week working year, these "minimum wage" earners would be taking home $32,380 (for the top 1%) and $55,760 (for the top 0.01%) a year! It's difficult to argue for this level of minimum wage when almost 40% of the American workforce made less than $20,000 a year in 2012, a year in which the median individual annual wage was just $27,519.

That's not to say that there's no argument for a minimum wage over twice as high as what we have today. In fact, when you look at growth of the American economy, and the growth of Americans' disposable income, you'll see that a $20 minimum wage might not be so crazy after all:

Sources: U.S. Department of Labor and St. Louis Fed.

Both adjustments, on a per-capita basis, push our new minimum wage over $19 an hour, and the results are similar when we adjust from 1950 and 1968 as well. If the American economy is really producing almost 8,000% more per person in nominal terms today than it was when the minimum wage was enacted, shouldn't every American have some claim to 8,000% more in nominal wages than their grandparents did in 1938?

There are a number of ways to frame the minimum wage debate, and these charts are only a starting point at best. When you look over the changes here, keep in mind that the American economy is incredibly complex and has millions of moving parts. Changing the size of an economic part as integral as the minimum wage is likely to have far-reaching effects that even the most careful analysis fails to fully understand. Even if you disagree with the other side's stance, you might find that they bring a valuable perspective to the table.

But what do you think the minimum wage should be? Let everyone know by leaving a respectful comment below.

The next step to make sure your future is anything but the minimum
Want to profit from analysis like this? The key for your future is to turn economic insights into portfolio gold through smart and steady investing ... starting right now. Those who wait on the sidelines are missing out on huge gains and putting their financial futures in jeopardy. The Motley Fool is offering a new special report, an essential guide to investing, which includes access to top stocks to buy now. Click here to get your copy today -- it's absolutely free.

Read/Post Comments (24) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 22, 2014, at 10:14 PM, MPA2000 wrote:

    The min. wage should be at least $15/hr. Heck the median income for the USA is nearly $50k. A min. wage of $20 is not unreasonable.

  • Report this Comment On February 22, 2014, at 10:19 PM, vet212 wrote:

    All raising the minimum wage as high as is being suggested will accomplish is a severe limitation on hiring of teenagers. and the accompanying lack of work etic developed by those teens. this however may be the reason for such a rise in that wage more people not working , more people dependent on Government benefitting the leftist side of the political spectrum

  • Report this Comment On February 22, 2014, at 11:30 PM, Jheebo wrote:

    A typically over analyzed article. Look, Social Security is tied to inflation, as well and many, many other things. Whatever the starting point, just do it. It gets tiring to hear the same arguments over and over every few years.

  • Report this Comment On February 22, 2014, at 11:33 PM, 2smartforlibs wrote:

    Since minimum wage is a trade off for low skilled workers to gain skill sin exchange for a lower wage and since a raise ALWAYS increase unemployment and drives up costs. Why is 10.10 the answer other than it came form the head left wing nut? Why not make it a thousand what is to high? for a radical liberal there is no to high. I Don't think you need an econ degree like I have to know an increase is a stupid idea

  • Report this Comment On February 22, 2014, at 11:43 PM, kimlo53 wrote:

    The reason the minimum wage never keeps paces with inflation is that every time it is raised the cost of living goes up. Raising the minimum wage will never solve the problem. It will just put more strain on a business bottom line. What needs to be done is lower taxes, but you will never see that. As long as Democrats are in control, they will keep on using the class warfare strategy because it works because of the low in formation voters . The government and these people know nothing about economics. The Democrats always want to raise the minimum wage and taxes. These two things destroy the economy and jobs.

  • Report this Comment On February 23, 2014, at 12:30 AM, dusty10x wrote:

    When the price of everything goes up what happens to the people left on fixed income?......I guess you help them....and then the next group and the next...When does it end after it starts? It won't end with just the minimum wage for workers....Everything else will also change because of it.........

  • Report this Comment On February 23, 2014, at 3:23 AM, ChMacQueen wrote:

    So many graphs and charts. Is it really so complicated to understand the extreme basic? Everytime you increase min wage you raise the prices on the goods they are involved with more then the min wage increase to offset the difference. Business owners are not going to take a cut in their profits just so the uneducated people at the bottom get a little more so the entire system just raises. This is called inflation. The only thing it accomplishes is to bring down the middle and upper class's while the poor stay poor and rich stay rich.

    If they really wanted to help the poor the best way is to stop helping them so much. Give them access to the tools to advance themselves and then let them struggle to do so. But as long as you keep teaching people through handouts its fine to be on the bottom because someone else will cover your bills the problem will continue.

  • Report this Comment On February 23, 2014, at 4:31 AM, AlabamaPoets wrote:

    There is an old law called the Law of Unintended Consequences...

    The vast majority of workers who make minimum wage have minimum job skills. Most of these workers did not take advantage of job training (read high school, military, etc.) when they had a chance to improve their skills at no or low cost to them. This is not cruel, but it is reality. Workers with job skills do not make minimum wage. Those who have needed job skills make a lot more than minimum wage. So what we are talking about when raising the minimum wage is artificially raising the wage rates for unskilled labor beyond what the market rates would give them.

    This artificial raising of wages for unskilled workers results in unintended consequences, such as companies deciding to automate processes or deciding they can do with fewer unskilled workers, both of which result in fewer jobs. The other unintended consequence is increased inflation. Who is going to pay the wage? For the very short term, companies may eat the increased labor costs. But, over time, companies will raise their prices to offset the increased labor costs caused by raising the minimum wage. Any benefit, in terms of increased purchasing power, is very short lived.

    What someone one minimum wage needs is skills, not an artificial raise in wages that will be eaten up by inflation caused by the need to pay for that raise. Many of these workers realize the mistakes they made in their youths and would take advantage of opportunities to learn new skills that would lead them to increased wages, not artificial increases that would soon be eaten up by inflation, but real wage increases that result from better skills that result in better jobs and real spendable income. If we are serious about lifting people out of poverty, a better way is to spend money on skill training and not on artificial increases in wages paid for unskilled workers...

  • Report this Comment On February 23, 2014, at 5:29 AM, jasonjjj27 wrote:

    So many angry people wanting the common low wage worker to stay low. I hear, "all those people are uneducated, they need to go to college those lazy eye soars". Well I see lots of college grads and various people with certain trades working for 7.25, because that is all that is being offered. Not every person gets to be an engineer. You all roll your eyes at coast of living increases v.s. min wage increases. The charts you skipped over after looking at them for 4 seconds are very real. Even the middle class can feel the sting of the increases and for many that make 30k+ a year "far above min wage" are pay check to pay check. Middle class now is just slightly over of what min wage workers could afford in the 40's. You never factor in that if private businesses pay workers more, they 1. would be less dependent on gov assisted programs. 2. People would have more $ and spend more and boost the economy. Why is everyone so bent up on raising peoples pay to a fair wage? Places like walmart and Mcdonalds and several other businesses are not as poor as you think they are, they make millions/billions every year in profit. How do they afford to keep opening up several dozens of stores each year to keep monopolizing the globe? The people at the top have all perfected a great formula at the expense of the work force and tax payers to become the elite 1%. They will never mention the profit they make, and they will always cry poor. bottom line is cost has not kept up with inflation and it is a wealthy mans marketing tool. It is very true that todays middle class is looking more and more like the min wage workers of the 50's, and todays min wage workers are making a fraction of what they should be payed.

  • Report this Comment On February 23, 2014, at 8:31 AM, ronvan wrote:

    While I agree that the min. wage should be increased, it boils down to just what should it be & its results. $10.10hr. sounds nice, BUT, business's WILL look at just how they can make up the "loss"! That, for me, means cutting hours, reducing full time to part time, doing more with less, and of course their prices increasing! Starting jobs, I.E. fast food places, etc., I have a hard time justifying $10.10hr. for flipping, pre prepared, food. Watress'es on the other side of the coin get paid below min. wage and rely on tips, and even have to put their tips in a pot to be divided between all. That doesn't work well when you have one that does not perform and others outperform in their service's! It is kind of a double edged sword! Workers get paid more, and happy, but prices go up, and WE are not happy!

  • Report this Comment On February 23, 2014, at 9:03 AM, WSK wrote:

    The real; solution to helping low wage earners is reducing the tax burden on business, especially small and medium sized businesses that are taxed to death by irresponsible government. If costs to do business were lowered, prices could be lowered and that is the real benefit for low wage earners. Jacking up minimum wage sounds nice, but the costs to business will be passed on to the consumer via higher prices and then the benefit of the wage increase gets wiped out. It has happened before every time they try this political stunt.

  • Report this Comment On February 23, 2014, at 9:16 AM, Jawrig wrote:

    If the Govt would quit devaluing the U.S. Dollar we would not need to raise minimum wages!

  • Report this Comment On February 23, 2014, at 12:37 PM, jdmeth123 wrote:

    The $1.60 I got at my first job in 1970 would buy 6 gal of gas, equal to $21. Compared to the DOW, $32, and gold, $58. Minimum wage is too low.

    We could add our minimum wage and regulatory cost to imports. That would give American manufactures a break.

  • Report this Comment On February 23, 2014, at 12:59 PM, VermontNative wrote:

    I think one of the issues with the minimum wage and the American economy is the lack of respect for honest work. If a company or individual has work that needs to be done than that work ought to be worth a wage that provides a living wage to the worker. Does this mean the minimum wage should be a "living wage", no that is too difficult to define and varies too much as you move about the country. However the minimum wage should be high enough to cover a cost of living calculated to be above the poverty level for a family of two people. Again a hard target to define and variable so you would have to take some type of national average or median for your base rate. A secondary economic issue to the wage issue is the loss of customers that companies experience as more people lose purchasing power. Any company that lowers its labor cost without adjusting their pricing may experience some wonderful short term profit growth. Long term they are eliminating their customers. WHAT PEOPLE EARN HAS A VERY DIRECT EFFECT ON WHAT PEOPLE SPEND.

  • Report this Comment On February 23, 2014, at 1:34 PM, sogole wrote:

    When the minimum wage is raised two things occur: (1) fewer jobs (2) Higher prices.

  • Report this Comment On February 23, 2014, at 1:36 PM, ataredlight wrote:

    seriously? taxes again? the wealthy pay lower taxes than ever....all the deregulation...and the result is this crappy economy. they want more breaks? pleeeeaaase! the greed never stops.

  • Report this Comment On February 23, 2014, at 2:49 PM, GuyBB wrote:

    Maybe everybody else's eyes just glazed over, but the real point of all of those graphs was ignored. Raising the minimum wage DOES NOT WORK! Despite repeated attempts, all the raising of the minimum wage has ever done, is cause inflation, economic turmoil, and failed utterly to increase the minimum wage earner's buying power in the long run.

    It is simple economic reality, raise prices for labor, and prices go up. As prices rise, laborers in skilled trades and unions demand to catch up with those rising prices. Increasing the labor costs in a whole host of other industries. When those costs get fed back into the pricing calculations in all other industries, a feedback loop is established, that doesn't end, until the minimum wage has LESS buying power then it had before the increase.

  • Report this Comment On February 23, 2014, at 3:31 PM, silverdragon8448 wrote:

    Remember the more you make the less the government will have to give you a tax credit for you insurance.

  • Report this Comment On February 23, 2014, at 4:55 PM, zxzxzx wrote:

    minimum wage is for college kids not to raise a family on. you can thank the illegals for doing this.

  • Report this Comment On February 23, 2014, at 4:57 PM, zxzxzx wrote:

    what is the true rate of inflation? think about what will happen to inflation if mw is raised to 15.

  • Report this Comment On February 23, 2014, at 5:40 PM, rangerchuck wrote:

    This is a race to stupidity. In the 1970's and 1980's during periods of very high inflation the unions and workers attempted to gain higher and higher salaries to keep up with the inflation. What happened was that the bench mark kept moving. So we now make $10.10 as the minimum wage. Where does that move the living wage? As the increase is in the range of 25% (lots of different minimum wages) so the living wage will increase by a large portion of that 25%. This is a no win game.

  • Report this Comment On February 23, 2014, at 11:26 PM, mtmanchris wrote:

    From an American working in Australia, I will tell you what the rise in min. wage will do you everyone of you.. Here in Oz land, Min wage is up to $20/hr depending on yorr age.. Price of a McD's Big Mac Meal close to $11. Tennis shoe equal to a $15 cheap pair from wal-mart is $40..Gas is $6/gal.. Eggs.. $3.95/doz.. Bananas $ 2/lbs.. Electrical bills are 250% more than in USA.. Taxes.. I pay 40% of my total income in taxes.. and for what??? Absolute BS.. While millions are on the DOL (welfare system) getting handouts to do nothing.. Probably the more laziest society in the world.. Heck, with the labor rates here, Holden (Chevy), Fod and Toyota are all removing manufacturing here by 2017.. Do you want this to happen to America?? The min wage is a political scheme by the democrats to buy votes.. If the min wage goes up, the cost of living goes u, meaning the poverty level figures go up again and the min. wage earnes are still in the poverty level.. This hurts the lower class and the middle class in the pocket books.. The upepr class laugh all the way to the bank.. Don't be fooled by this political scheme or the immigration bill being pushed by the deomcats.. It is to buy votes, but in the end will hurt 99% of the American people..

  • Report this Comment On February 24, 2014, at 12:01 AM, MoneyRose wrote:

    The minimum wage should go to $25 per hour. The formula for correcting our economy would hinge upon the other factors that go into labor and commerce. The pressure from that wage would make businesses stop being open 24 hours. They would save money by saving energy. Turning off all that energy from the current waste stream of lights and heating and cooling would benefit the world. Also at that price workers would go to a short work week of 20 hours. They would have time for raising kids, not have to pay day care. Workers could find 2 jobs at that rate and get their 40 hours. The internet shopping would allow people to shop online more and they already have started relying more on the internet for getting everything. The brick and mortar people need to embrace this and make a change in the way their operate.

  • Report this Comment On February 24, 2014, at 11:47 AM, hambone1969 wrote:

    Well it all depends on what "inflation" number the government decides to create. Today they insist there is "tepid" inflation, because we strip out food, energy etc. Those are the most important purchases people make weekly, yet they are not pegged in the inflation rate. So.....

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2850025, ~/Articles/ArticleHandler.aspx, 8/28/2015 3:40:05 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Alex Planes

Alex Planes specializes in the deep analysis of tech, energy, and retail companies, with a particular focus on the ways new or proposed technologies can (and will) shape the future. He is also a dedicated student of financial and business history, often drawing on major events from the past to help readers better understand what's happening today and what might happen tomorrow.

Connect with Alex on LinkedIn or Twitter for more news and insight:

View Alex Planes's profile on LinkedIn

Today's Market

updated Moments ago Sponsored by:
DOW 16,577.40 -77.37 -0.46%
S&P 500 1,982.13 -5.53 -0.28%
NASD 4,808.51 -4.20 -0.09%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes