Academic journal article Monthly Labor Review

The Minimum Wage: Its Relation to Incomes and Poverty

Academic journal article Monthly Labor Review

The Minimum Wage: Its Relation to Incomes and Poverty

Article excerpt

Federal minimum wage legislation provides a floor on the hourly wage rate that employers are allowed to pay most workers. First enacted as part of the Fair Labor Standards Act of 1938, this statute now requires a wage of at least $3.35 per hour for the almost 90 percent of nonsupervisory civilian workers to whom the act applies. Although the minimum wage has been increased numerous times since it was established, it has remained unchanged since January 1981. Because prices and wages have risen since that time, the real value of the minimum wage has fallen.

In recent years, several proposals have been made to change the minimum wage, including increasing it for all workers, reducing it for younger workers just getting started in the labor market, and eliminating it. These alternatives are based on differing views about the effects of the minimum wage at its current level. Some people believe it is too low to provide low-wage workers with an adequate standard of living, while others maintain that the present minimum limits employment opportunities-especially for young workers-by artificially raising wage costs to employers.(1)

One issue relevant to debates on the minimum wage is the relation between that wage and poverty. Proponents of increasing the minimum wage argue that it should be at least high enough to provide above-poverty earnings to workers with families to support. This article investigates empirical evidence about the relationship among low wage rates, income levels, and the incidence of poverty using data from the March 1985 Current Population Survey (CPS). Unlike wage surveys based on payroll and other business records of employers, this household survey also provides information on the demographic and social characteristics of the workers, as well as their income and poverty status in the preceding calendar year.(2)

Background of the minimum wage

Historically, changes in the minimum wage provisions of the Fair Labor Standards Act have consisted primarily of increases in the wage rate and expansions in coverage.(3) The minimum wage, which was originally set at $0.25 per hour in 1938, reached $1 per hour in 1956, $2 per hour in 1974, and the current level of $3.35 in 1981. (See table 1.) Coverage originally was limited to workers directly engaged in interstate commerce, or in the production of goods for interstate commerce, but has been expanded considerably. In 1985, about 73 million nonsupervisory workers-or almost 90 percent of that work force-were subject to the minimum wage. Major groups currently not subject to the minimum wage include executive, administrative, and professional personnel; employees in some small firms; and, of course, the self-employed.

The remainder of this section analyzes the history and current status of the minimum wage by considering its relation to average prices and wages in the economy, and to Federal poverty thresholds.

Prices, wages, and the minimum wage. One perspective on the size of the minimum wage today can be obtained by analyzing the real purchasing power of the wage over time, and by examining its relation to average wages.

The purchasing power of the minimum wage-that is, its value after taking account of inflation, here measured with the Consumer Price Index-has fluctuated considerably over time, but today is less than at any time since the mid-1950's. In 1985 dollars, the minimum wage was worth just under $2 per hour when the legislation was enacted in 1938. (See chart 1.) By 1968, the real value of the wage had reached a high of nearly $5 per hour, but by 1985, it had declined to $3.35. In the 5-year period between January 1981 -when the minimum wage was set at $3.35- January 1986, average prices increased by about 26 percent. To have the same purchasing power it had had at the start of 1981, the minimum wage would have had to have been about $4.22 per hour in January 1986.

In recent years, the minimum wage also has fallen as a share of average wages. …

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