The Myth Busting Economist by Larry Malone

Does Minimum Wage Serve Any Purpose?

The minimum wage is an economic subject that we don’t hear much about these days. A federally mandated minimum wage has been with us since 1938, when Congress and President Roosevelt enacted a 25 cent-per-hour minimum to ensure a living wage for all workers. Our myth busting task in this column is a tough row to hoe, since there is no agreement among economists as to whether the minimum wage is effective in boosting the well-being of workers and families.

The introduction of a minimum wage at the end of the Great Depression was largely a success, but the verdict in more recent times is more mixed. Let’s look at some of the key developments concerning today’s minimum wage.

The first is that a federal minimum wage was never able to account for the dramatic differences in the cost of living among the 50 states. It’s always been cheaper to live in central New York than in Los Angeles, Chicago, Boston, Dallas or Atlanta. A one-size-fits-all approach, with a standard minimum wage for everyone, could never account for vast differences in the cost of living across the country.

Secondly, it takes action by Congress and a presidential signature to increase the federal minimum wage. In the last four decades, changes in the minimum wage have only occurred after longer and longer intervals of time. For instance, the federal minimum was raised to $3.35 per hour in 1981 and remained unchanged until 1990. But the rate of inflation increased 45 percent that decade! Seven years later, in 1997, the federal minimum wage was increased to $5.15 per hour, but remained unchanged until it was boosted to $5.85 per hour 10 years later, in 2007. Such infrequent and small increases mean that entry level workers have lost considerable purchasing power and well-being to inflation, and have effectively become worse off.

This brings us to a third flaw in the federal minimum wage; namely, the long intervals of years without an increase would be washed away if increases had been tied to the cost of living. These COLA’s (cost of living adjustments) have been used to keep Social Security benefits on pace with inflation since 1975. Because COLAs adjust to the rate of inflation each year, they would put an end to the political Wrestle Mania that ensues when an increase is long overdue. Additionally, the whopper effect from a big catch-up increase imposes a hardship on businesses that employ lots of entry-level workers.

The current federal minimum wage has been stuck at a measly $7.25 per hour since 2009…a full 15 years! But a state can enact a minimum wage that is above the federal standard. Given the reluctance of our hapless elected federal officials to pass an increase, states have stepped in to fill the gap. Currently, 34 of our 50 states have a minimum wage that is above the federal standard of $7.25 per hour. This means that the federally mandated minimum wage has no real bite anymore, and has essentially become irrelevant.

One positive from yet another example of political paralysis at the federal level is that state minimum wages now compensate for the large differences in the cost of living across the country. It’s no surprise that California, Connecticut, Washington, New Jersey and New York are among the states with the highest minimum wages.

Finally, as was noted in my previous column on the trade deficit, our unemployment rate of 4.1 percent means that we are living in a full employment economy. An extraordinarily low unemployment rate has created a “seller’s market” for folks seeking work, or considering a new job. That’s why the doorways to local businesses have help wanted signs, and why most of those entry-level jobs are offering starting pay that is above New York’s $15.00 per hour minimum wage.

Jobs are plentiful and workers are scarce—and not because people are getting handouts and/or welfare from the government. That’s a local myth that I hear all of the time. The COVID stimulus checks—two from Trump and one from Biden—ended three years ago!

There’s an easy solution to solving the shortage of workers in a full employment economy, and you’ll be reading about it next time.

Larry Malone is professor emeritus of economics at Hartwick College.