The minimum wage is back in the news lately after President Obama pledged to raise it to $10.10 an hour for federal contractors in his 2014 State of the Union address, and it's become yet another political lightning rod for polarized Washington. One side of the aisle demands more support for workers on the lowest rung, while the other side warns that jobs will be lost if wages spike. What's often obscured in this debate is a simple question: What is the minimum wage really worth?
We know how the minimum wage has changed over time, and it's easy to see these changes on both a nominal and a real basis with a little legwork. But even when we contemplate the "real" value of the minimum wage after adjusting for inflation, we often forget that both nominal and real prices of essential goods and services have changed quite a bit over time. One way to better understand the value of the minimum wage is to find out what it could really purchase.
First, here's a quick historical chart of the minimum wage since its inception in 1938, so you can see how today's rate stacks up against earlier times:
Source: U.S. Department of Labor. Adjusted with Consumer Price Index for Purchasing Power.
Today's minimum wage earners are making less than their parents (or grandparents) might have made on an adjusted basis -- the current nominal $7.25 hourly rate has not been matched in real terms since the early '80s. But it's possible that today's minimum-wage earners can support themselves just as well, if the price of essential commodities has fallen relative to that wage. Has it? Let's take a look at the historical price of a gallon of gasoline and a gallon of oil in minimum-wage terms now:
Sources: U.S. Department of Energy and U.S. Bureau of Labor Statistics.
Sources: U.S. Census Bureau, U.S. Department of Labor Statistics, and the University of Illinois.
Milk costs have been in long-term decline relative to the minimum wage, but the spike in gas prices over the past decade has made it harder for minimum-wage earners to fill up their tanks than it's been in almost 70 years. But can minimum-wage earners afford a car in the first place? Not really:
Sources: The Cost of Living and U.S. Bureau of Economic Analysis.
If you think it would be tough working for nearly two years (and somehow managing to not spend a dime on anything else) to buy a new car, you probably won't want to see how far out of reach the average home is for a minimum-wage earner today:
Sources: The Cost of Living and St. Louis Fed.
Even after the housing bubble, minimum-wage earners are further away from their housing dreams than they've been in decades. The 1960s must have been an amazing time. It took only about 13,800 hours of minimum-wage work to buy an average house at the end of that decade, compared with about 37,500 hours today. There are a few reasons for that. One reason is that the minimum wage continues to fall further away from the average household wage with every passing year, notwithstanding the occasional bump to the nominal hourly minimum:
Source: U.S. Census Bureau.
Recent wage hikes have brought the minimum wage up to roughly a quarter of the value of the average household hourly wage (assuming a 40-hour week for 50 weeks per year), but that still hasn't been particularly helpful in terms of making the minimum wage livable. Minimum-wage workers would still need to put in almost 700 hours a month today to earn what the average household makes in a month.
The costs of other basic necessities show that the minimum wage isn't really keeping pace in a number of ways. The time it takes for a minimum-wage earner to pay for a long-distance phone call has plunged, but average monthly phone bills continue to soar. And while clothing costs have been in a long-term decline (compared to overall purchasing power, but not to the minimum wage), household food expenses are pricier for minimum-wage earners than they've been since the end of World War II:
Source: Federal Communications Commission.
Sources: St. Louis Fed and the U.S. Department of Agriculture.
When you add it all up, it seems quite clear that minimum wage simply isn't what it used to be, and it certainly can't buy what it used to, either -- unless you really like milk or need to have a good wardrobe.
One thing has changed more than ever, though. The gap between America's highest earners and its lowest earners spiked to all-time highs just before the financial crisis, and while it's yet to recover to that peak, it does seem likely that America's top 1% -- and more particularly, its top 0.01% -- will recover better than minimum-wage earners could hope to, especially considering how adamant many of them are about maintaining, reducing, or even eliminating the minimum wage.
Source: The World Top Incomes Database.
What is the future of America's minimum wage? Can it ever again give the lowest-earning Americans a shot at a decent life, or has it become too toxic a subject in Washington to ever regain real purchasing power? Let the world know what you think about these trends by leaving a comment below.
