Opening #3 (Meaning I’ve thrown away two entire versions of this post)
Who would have guessed it? The history of the minimum wage in the US is a fairly dry and appalling depressing topic. I thought that by looking at previous minimum wage increases I could come up with some simple math for what a reasonable minimum wage would be now. This, of course, is silly because as I’m sure everyone else already knows the minimum wage has nothing to do with math and everything to do with politics. (Maybe a little tiny bit to do with philosophy, but it’s mostly politics.)
As usual, I have ended up writing the opening last. After throwing out a lot of numbers, and a little history I finally reached something that passes for a conclusion and I’m moving it here. My take away from all the number-crunching that follows is that the current system of trying to negotiate static increases every few years does not work. We have watched it not work for 70 years. For the minimum wage to be a viable living wage it needs to be indexed to something real. Whether that index is based on median household income, median rent, some percentage of homeownership cost, I don’t know. I could see arguments for or against any of those. I could also see an argument that the indexing needs to be done at a state or local level to account for variation in the cost of living. What we can’t keep doing is saying “ok, the minimum wage is X, let's raise it to Y and that should be good enough, now go away and don’t bother us, after all, you should be grateful you are getting anything.” All that does is leave us in a perpetual cycle of falling farther and farther behind. If we look at minimum wage from the perspective of what it is right now and talk about increases in proportion to the current level we will never reach anything resembling a living wage.
The problem with looking at things like pay from the point of view of percentage increases is that if a job or a person starts out behind or falls behind it (the job) or they (the person) can never catch up. The minimum wage is so substandard right now that a 100% increase still would not make it a living wage in many areas.
When Franklin D. Roosevelt signed the first minimum wage bill into law in 1938 the country was struggling to get out of a deep depression and I would imagine almost any wage looked better than nothing, even $0.25/hr. The fact that Congress increased it by 20% in 1939 shows that the politicians of the time knew that $0.25/hr was too low. The 1945 amendment increasing the minimum wage to $0.40/hr was essentially a maintenance measure and did nothing to address the low starting point. The 1949 amendment jumping from $0.40/hr to $0.75hr was another correction almost on par with the 1939 boost. The 1949 amendment took the minimum wage to a point that one could argue it was a viable living wage. If congress had included an automatic 4.6%-4.8% annual increases from then on we would now have a minimum wage in the $18-$20/hr range and the country would be a very different place. In 1949 I don’t think anyone would have believed what would happen to the cost of housing and the median income of the next 70 years. I’m guessing that even now some people (maybe even many people) would still balk at the idea of setting an annual increase of 4.8% or even 4.5%. However, if you look at the history that is exactly what we would need if we want to use percentage increases rather than indexing to the current cost of living.
I hope it is fairly well understood that in this day and age a person working 40 hours a week for minimum wage is hard-pressed to survive, let alone support a household. The current debate seems to revolve around whether someone should be able to live on a full-time minimum wage job. This was not always a question. Franklin D. Roosevelt was very clear in his stance on the minimum wage. He said,
“In my Inaugural I laid down the simple proposition that nobody is going to starve in this country. It seems to me to be equally plain that no business which depends for existence on paying less than living wages to its workers has any right to continue in this country.”
He didn’t even use the term “minimum”. No business should pay less than a living wage. Seems pretty clear. Whether the minimum wage met that standard at its inception is debatable. Even in 1938 $0.25/hr was definitely on the low side. The first point of comparison I’ve found for getting a direct comparison of the minimum wage to household income or cost of living is the 1940 census. By 1940 the minimum wage had been increased to $0.30/hr. The median household income in 1940 was $1,725/year or $0.83/hr. That makes the minimum wage just over 36% of the median household income.
The minimum wage hit its highest point in comparison to median household income in 1950. The amendment of 1949 went into effect in January of 1950 raising the minimum wage from $0.40/hr to $0.75/hr. The Median Household income reported in the 1950 census was $2990 or $1.44/hr. So the 1950 correction made the minimum wage 52.17% of the Median Household income. In 1950 the median rent was $42/month. That’s roughly ⅓ (32.3%) of a full-time minimum wage income for a month. The Median home value was $7,400. Roughly 4.75 times a full-time minimum wage income for a year. I think a strong case can be made that this constituted a living wage. No one was going to get rich on $0.75/hr, but you could pay the rent and eat.
Contrast that with 2010 (the last year for which we have census data). In 2009 the US minimum wage went up to $7.25/hr (where it still sits today ). The Median Household Income in 2010 was $49,445. This was actually down more than $5,000 from 2000 due to the 2008 subprime mortgage crash and resulting recession. This jumped the minimum wage all the way up to 30.5% of Median income which was a huge recovery from 2000 when it had been down to an all time low of 19.47%. In 2010 the median rent was reported as $901/month. That is almost 72% of a full-time minimum wage income for a month. The median home value was $221,800. That is roughly 14.7 times a full-time minimum wage income for a year.
Absent 2020 census data, I resorted to Wikipedia. Per Wikipedia, the 2020 Median Household income is $78,500. The minimum wage was still $7.25/hr, so working a minimum wage job 40 hours a week would have earned you $15,080 for the year. That puts us at a new all time low of 19.21% of the 2020 Median Household income. To reach the 52.17% threshold of 1950 the 2020 minimum wage would need to be $19.69/hr. (Just under $41,000/year).
So how did we go from minimum wage being 52.17% of household median income in 1950 to 19.21% in 2020?
The basic history of minimum wage amendments is relatively easy to track down. The department of labor has a good summary.
https://www.dol.gov/agencies/whd/minimum-wage/history
https://www.dol.gov/agencies/whd/minimum-wage/history/chart
Since its inception in 1938 the federal minimum wage law has been amended eleven times. The amendments have come at inconsistent intervals and have had wildly variable impacts. For instance, the 1961 amendment had more provisions dealing with expanding who the minimum wage covered than increasing the amount. Seven of the amendments included increases that were phased in over 2 to 4 year periods. Because of these variables, it is hard to talk about a “typical” increase. The overall trajectory is one of steady decline barely slowed by amendments that are long overdue and inadequate to make up for time and inflation. The best method I have come up with for looking at the historical movement has been to consider the entire increase for a given amendment amortized as if it had taken effect evenly across the time from the final increase of the previous amendment to the full roll out of the current amendment.
Consider the examples of the 1977 and 1989 amendments.
- The 1977 amendment increased the minimum wage from $2.30 in January 1976 to $3.35 in January 1981. The overall increase was $1.05 over a period of 5.01 years. Starting at $2.30 this would be achieved with an annual increase of 7.80%. This was the largest increase in terms of annual percentage since the 1949 amendment.
- The 1989 amendment increased the minimum wage from $3.35 in January 1981 to $4.25 in April 1991. The overall increase was $0.90 over a period of 10.25 years. Starting at $3.35 this would be achieved with an annual increase of 2.35%. This was the smallest increase ever in terms of annual percentage.
Using this method we get the annual increases in the table above ranging from 2.35% to 20%. If we apply the same method over the 70.8 year history of the minimum wage from the time of its inception in 1938 to the last increase in 2009 we end up with an overall average annual increase of 4.87%.
If we apply those percentages to the current interval since the last increase in July of 2009 (call it 12 years to make calculations easier) we see potential minimum wages ranging from $9.58/hr using the 1989 amendment to $64.64/hr using the 1939 amendment. If we apply the 4.87% average increase to that 12 year gap the minimum wage in July 2021 would be $12.83/hr.
Does this mean that if we increase the minimum wage to $12.83/hr this summer and implement annual increases of 4.87% everything is fixed? No, not really. This is where the inadequacy of the increases over the last 70 years come into play. If the 4.87% increase had been applied consistently since 2009 the minimum wage in 2020 would have been $12.23/hr. That’s still only 32.41% of the median household income (from Wikipedia), nowhere near the 52.17% standard set in 1950. What would we have to do to reach 52.17%? If we accept the Wikipedia estimate of $78,500/year as the median household income in 2020 the minimum wage would need to have been $19.69/hr in 2020. To go from $0.75/hr in 1950 to $19.69/hr in 2020 would have required annual increases of 4.78%.
“But wait”, I hear you say. “I thought you said that the average increase over the entire history of the minimum wage was 4.87% and that if we applied that up to 2021 we would only be at $12.83?”
Yes, you heard right. Welcome to the joys of compound returns and the relative impact of starting value and compounding periods.
- Scenario A) Starting in 1938 at $0.25, increasing by 4.87% annually gets us to $7.25 in 2009 and $12.23 in 2020. ($12.83 in 2021)
- Scenario B) Starting in 1950 at $0.75, increasing at 4.78% annually gets us to $11.78 in 2009 and $19.69 in 2020. ($20.63 in 2021)
This is also why I refer to the 1949 amendment as a correction. The annualized increase in 1949 was 15.91%. I don’t think even the FDR or Truman administrations would have suggested that the minimum wage needed to go up that much every year. It needed a large boost to get to a viable level from which it could have been maintained. The fact that it was not maintained is the failure of the subsequent administrations.
But where does that leave us? As I was writing this when I reached this point I had thrown out a lot of numbers, and a little history and offered no opinion about what I think the minimum wage should be. This is what led me to the conclusion that piecemeal increases will continue to be ineffective and that given the seeming unwillingness to institute a standard annual increase, we need to find a way to make the minimum wage reflect the realities of what it costs to live.
When I first started looking over the history of the amendments it seemed fairly clear that the minimum wage has rarely had any champions in Washington. Since the end of the Truman administration even at times that Democrats have controlled both houses of congress and the white house, they have been unable or unwilling to maintain the minimum wage at anything close to the 1950 level. The Carter administration made some headway in the late 70s, but not nearly enough to make up for the losses in the 50s and 60s let alone offset the impending disaster of the Reagan years.
I have not done any real research on whether there have been other attempts at amendments that have failed. I'm sure there are stories to be found.
Was the 1996 amendment (the only one ever passed by a Republican congress) a ploy to push Bob Dole ahead of Clinton in the '96 presidential election?
When Democrats regained control of the house and senate in 1986 did they pass an amendment that Reagan vetoed? Was there a threat or promise of a veto that Democrats chose not to challenge?
The biggest question though is: What are congressional Democrats and the Biden administration going to do right now? By every standard I can find the current minimum wage is the worst it has been since its inception. There is no guarantee that Democrats will be able to retain control of the house and senate in 2022. Given that, it is crucial that they act decisively while they can.
