Wednesday, January 16, 2008

Minimum Wage in Real Dollars

My sister blog, Money Hacks, has just posted a piece on the minimum wage and how it hasn't kept up with price inflation and lags far behind wage inflation.


I have mixed philosophical perspectives on the merits of a minimum wage, much less how much it ought to be. But this excerpt from Andrew Tobias gives a glimpse into how low the minimum wage is now relative to its level in years past.
It was $1.60 in 1968, equal to $9.33 in 2006 dollars and nearly $10 today in 2008. Except that it’s not nearly $10 today, it’s $6.50 . . . going to $7.25 September 1.

So by September, when that final hike kicks in, the minimum wage will be about 27.5% lower, in real dollars, than it was in 1968.

Most know that the Republicans kept the minimum wage frozen at $5.15 for ten years and would have kept it there today if they still controlled the Congress. (“Good!” I hear some of you cry.)

Less frequently mentioned is that that comparison – the 27.5% drop in real purchasing power come September – is based on an adjustment for price inflation. Based on wage inflation – the increase not in average prices since 1968 but average wages – the working poor have fallen even further behind. Adjusted for wage inflation, the 1968 minimum wage was about $17 in today’s dollars, more than double what it will be in September.

This is not to say we could raise it anywhere near that high now.

But for those of you who believe, as I know many of you do, that even the hike from $5.15 was bad economics (but that cutting taxes on the rich and eliminating the estate tax on billionheirs is good economics), I thought these comparisons might provide additional perspective.
Puts things in a different perspective, no?


Libertine said...

Thanks for this entry. I read an article sometime back that pointed out that one person working full time at the minimum wage in 1973 was able to keep a family of 3 above the federal poverty line. Nowadays that same worker can't even keep themselves above it.

I place the blame on the Reagan and first Bush administrations, as the minimumm wage was not increased at all during those 12 years, and that's how the minimum wage lost its buying power. If they'd raised it in small increments each year, I think it would have had a chance on retaining the buying power it had in the sixties and seventies. It would have been more easily absorbed by the economy that way, unlike the jolt it would take if they tried to make up for what it's lost all at once.

T.Pettinger said...

Thanks for the article. US readers may be interested in the UK experience in the past 10 years the Minimum wage has been increased much faster than the rate of inflation £3 an hour to £5.75 an hour. Yet, in that period unemployment has fallen. In one way it contradicts classical economics but, there are also other explanations.

Tejvan Pettinger