Arin Miller
How much money an hour does it take to be able to live in comfort and pay all your bills? According to the US government, not much. The federal minimum wage has sat at a barebones $7.25 an hour ($15,000 a year) minimum wage since 2009, while inflation has skyrocketed. It doesn’t take a financial specialist to see that this doesn’t make sense. Minimum wage workers are making comparatively over 40% less than they were in the late 60s, and rising costs in every aspect of life force millions into living paycheck to paycheck (Martin and Steele 2023). Why hasn’t the minimum wage risen with inflation over time? The United States is one of the only countries in the world where our minimum is determined by the hands of politicians as opposed to economists. Determining minimum wage by statute leads to it being nearly impossible to make consistent changes and keep up with inflation. The real minimum for any given person depends on their state, some going as high as $15 an hour, while others are only as high as the Federal minimum. However even in these cases of a higher wage, with the cost of living so high in places like New York City, this still isn’t a true livable wage. The US needs to reevaluate how we handle minimum wages so that every working American can live with dignity, afford basic necessities, and actually be able to save for their future. There are many ideas as to how this can happen, but the first, most necessary step is paying every worker a fair living wage.
Before we can look at solutions, we need to understand the issues at play. Everyone’s heard the word inflation thrown around in the news and by politicians. However, many don’t know what it actually is and what caused it to rise so dramatically. The Harvard Business Review defines inflation simply as “the rise in prices across an economy” (Frick 2022). When inflation rises, prices rise. A simple explanation for why inflation happens is when there is “too much demand relative to supply” (Frick 2022). In other words, when people want to buy more than what’s available, prices rise to rebalance everything. This happens because of 3 main things – Money supply, expectations and spirals, and supply shock. Each of these categories has its own nuance and exceptions, but a simple explanation of each can help understand what’s happening and put some potential solutions into perspective. Supply shock is as the name suggests; major disruptions in the supply of goods, such as energy. The war in Ukraine caused the prices of oil to skyrocket and the prices of energy across the world to do the same. The second cause, money supply, has to do with the demand side of the equation. This is where you’ll hear Milton Friedman’s “too much money chasing too few goods” (University of Chicago 2012) quote. Economist David Moss writes in his book, A Concise Guide to Macroeconomics: What Managers, Executives, and Students Need to Know, “With more cash in their pockets and bank accounts, consumers often find new reasons to buy things,” and continues, “But unless the supply of goods and services has increased in the meantime, the consumers’ mounting demand for products will simply bid up prices, thus stoking inflation” (Moss 2007). However, more than anything, inflation has to do with uncertainty and expectations. It’s not exactly the change in supply and demand itself that really causes inflation, it’s the unexpected change. Even the anticipation of inflation can be a cause, leading to wage-price spirals (Frick 2022). Another important point is the connection between inflation and unemployment. A common analogy economists use is that the economy has a certain amount of “slack.” Slack refers to the number of unused resources in an economy, such as workers without jobs or factories producing nothing. When there’s little slack, or most resources are being used, inflation becomes likely. At least in the short term, it can seem like there’s an inverse relationship between inflation and unemployment, where unemployment goes up then inflation becomes less likely or unemployment goes down and inflation is likely. Unfortunately, in 2020 with the rise of COVID-19, we were left with a massive rise of inflation which made a bad situation worse for the years following. Inflation in 2021 and 2022 has largely been caused by “Shipping snarls” (Backlogs in the supply chain and shortages of essential materials) and worker shortages from COVID-19, as well as spikes in food and energy costs due to the invasion of Ukraine (Hernandez 2023) (Tan 2022). Many countries also gave lots of money through stimulus checks to people during COVID-19 to make sure they could stay afloat amidst layoffs and lockdowns. This meant people had more money to spend on physical goods, but a lack of workers and resources to produce them (Frick 2022).
Although inflation is no longer at the peak it was during 2021 and 2022, it’s still at the highest point it’s been since 2011. Although at a current rate of around 4%, The Federal Reserve’s goal of 2% or lower is still a long way away (US Bureau Of Labor Statistics 2023). The actual data on all of this is gathered by the Consumer Price Index, or CPI. CPI is a graph that collects data from the prices of all the most purchased goods and brings them together in a weighted average. This is commonly what’s referred to when people talk about inflation, and it’s used in a few key places like the US poverty line. The way this is calculated is extremely outdated and isn’t an accurate representation of the amount of money you need to live. This number, calculated simply by taking the CPI for food prices and multiplying it by 3, leaves us with our poverty wage. This not only neglects transportation costs and emergency funds, but it also neglects the area you live in. For perspective, the federal poverty line is the same whether you live in rural Iowa or Los Angeles, while the costs of living are drastically different. The poverty line ends up equating to about $13,900 a year for a one-person household, or $6.50 an hour. An actual “living wage” is a term that is thrown around a lot, but it’s a more comprehensive calculation of how much money it takes to actually live. It accounts for transportation, healthcare, emergencies, and being able to save. It also crucially accounts for the area you live (Bill 2019). A great tool is the MIT Living Wage Calculator which can show down to the county how much a person needs to live. The data it provides shows the amount necessary for people with kids as well, with 2 adult households and a few other variables also included. For perspective, in NYC, the minimum wage is $14.20 an hour, and the livable wage for one person with no kids is $22.51 an hour. For a single parent with 3 kids that goes up to $77.63 an hour to live modestly (MIT Living Wage Calculator). How do people who are under this amount afford to pay all their bills and expenses? In short, they don’t. Millions are faced with making impossible decisions, on an almost daily basis. Insurance or childcare? Groceries or clothes? Forget about saving for your future or college, something the living wage calculator doesn’t account for. It’s time we stop using a system that hasn’t changed since the 30s and keep up with what other countries have been doing since the beginning. We need to make it possible for every worker to have basic necessities in the richest country in the world.
The Fair Labor Standards Act of 1938 established the first minimum in the US at $0.25 an hour, and in doing so inadvertently made it extremely difficult to adjust the federal minimum wage (Grossman 1978). This is because it puts the responsibility on politicians, meaning a new law has to be passed every time we want to raise the wage. This is the reason workers are making comparatively over 20% less than when the federal minimum was last adjusted (Cooper et al. 2022). This is not the norm in most other countries, “In at least 115 countries, the central government (or an official such as a labor minister) sets minimum wages by regulation, order or decree, typically pursuant to some authorizing law. In about three-quarters of those countries, government action is supposed to come only after input from workers’ and employers’ organizations – ranging from unspecified “consultations” to formal recommendations from structured minimum wage boards or commissions” (Desilver 2021). Raising the minimum wage seems like the obvious solution, but why are some politicians so adamant in stopping any efforts to raise the wage in their tracks?
An increase in minimum wage is brought up routinely in the U.S. Senate but has faced numerous shutdowns. Many politicians have different worries and justifications for rejecting acts to raise the wage, many of which make basic sense. However, by looking at historical precedent and economic literature we see many of their arguments are more fear than fact. Some of the more outlandish justifications include fear of an overreach of federal power and the infamous ‘pick yourself up by your bootstraps’ attitude that blatantly disregards inflation and the current state of low-wage workers. Besides these claims, there are seemingly few valid counterarguments to examine. The first of which is that raising the minimum will lead to wage-price spirals and increase inflation even more. However, if we look back in time to when the minimum was changed almost yearly, there’s very little evidence this would be the case. A study by W.E. Upjohn Institute for Employment Research found that prices “ grow by 0.36 percent for every 10 percent increase in the minimum wage.’ Moreover, increases in prices following minimum wage hikes generally have occurred in the month the minimum wage hike is implemented, and not in the months before or the months after” (Hayes 2023). So while there is a slight correlation, it is not nearly enough to justify not raising the minimum. Another common argument is that increasing the federal wage puts impossible pressure on small businesses to pay their employees more and leads to the businesses’ bankruptcies. There are a few reasons this isn’t true. To start, the proposed Raise The Wage Act would have the minimum raised slowly over time to allow time for businesses to adjust. Beyond this, economic literature shows that the upsides of paying your workers fairly outweigh the extra cost. “A $15 minimum wage, combined with further federal relief for small businesses, will benefit small and medium-sized enterprises in the long run. Economic literature has found that increases in worker productivity, reductions in turnover, and aggregate increases in consumer spending offset a large portion of the increased payroll costs” (Willingham 2021). One argument that could potentially pose a concern is how raising the minimum could be tied to unemployment. This again is refuted by actual economic literature. “Federal and state minimum wage changes over the period 1992 to 2016 did not reduce employment, either overall or among specific groups of less-educated workers” (Reich 2019). This information is also supported by looking at past minimum increases, with no more than a 0.5% decrease in employment being shown.
Families are faced with impossible decisions every day and are forced to make sacrifices of basic necessities to get by. We need to start taking care of the millions working minimum wage jobs and help bring a living wage to every worker. Inflation needs to be accounted for, and it needs to be handled with regard to the people. Many movements are already out there. Fight For 15 is continuing to battle for livable wages by gradually raising the minimum up to $15 an hour over the course of a few years. Although it’s not the whole solution, it is a long overdue step in changing a broken system. Dignity should be the standard, not the exception for everyone living in America.
Arin is a sophomore and the Managing Editor for Valley Unveiled. Arin has a strong passion for the arts and the world around us and enjoys baking, music, and the outdoors.
References
Cooper, David, Sebastian H Martinez, and Ben Zipperer. 2022. “The value of the federal minimum wage is at its lowest point in 66 years.” Economic Policy Institute, July 14. https://www.epi.org/blog/the-value-of-the-federal-minimum-wage-is-at-its-lowest-point-in-66-years/.
Desilver, Drew. 2021. “The U.S. differs from most other countries in how it sets its minimum wage.” Pew Research Center, May 20. https://www.pewresearch.org/short-reads/2021/05/20/the-u-s-differs-from-most-other-countries-in-how-it-sets-its-minimum-wage/.
Frick, Walter. 2022. “What Causes Inflation.” Harvard Business Publishing, December 23. https://hbr.org/2022/12/what-causes-inflation.
Flynn, Jack. 2023. “20+ Crucial Minimum Wage Statistics [2023]: Facts, Predictions, and More.” Zippia, July 4. https://www.zippia.com/advice/minimum-wage-statistics/.
Glasmeier, Amy K. 2023. “Living Wage Calculator.” Massachusetts Institute of Technology. https://livingwage.mit.edu/.
Grossman, Jonathan. 1978.“Fair Labor Standards Act of 1938: Maximum Struggle for Minimum Wage” U.S. Department of Labor, June. https://www.dol.gov/general/aboutdol/history/flsa193.
Hayes, Adam. 2023. “Does Raising the Minimum Wage Increase Inflation.” Dotdash Meredith, May 30. https://www.investopedia.com/ask/answers/052815/does-raising-minimum-wage-increase-inflation.asp.
Hernandez, Richard. 2023. “What caused inflation to spike after 2020?” US Bureau of Labor Statistics, January. https://www.bls.gov/opub/mlr/2023/beyond-bls/what-caused-inflation-to-spike-after-2020.htm.
Martin, Erik J and Jason Steele. 2023. “Living paycheck to paycheck statistics.” Bankrate. September 18. https://www.bankrate.com/finance/credit-cards/living-paycheck-to-paycheck-statistics/.
Moss, David. 2007. “A Concise Guide to Macroeconomics: What Managers, Executives, and Students Need to Know.” Harvard Business Review, July 5.
University of Chicago. 2016. “Milton Friedman in his Own Words.” https://mfidev.uchicago.edu/about/tribute/mfquotes.shtml.
Rebholz, Bill. 2019. “What a ‘Living Wage’ Actually Means.” The New York Times, June 5. https://www.nytimes.com/2019/06/05/smarter-living/what-a-living-wage-actually-means.html.
Reich, Michael. 2019. “Likely Effects of a $15 Wage by 2024.” Center on Wage and Employment Dynamics, February 7. https://www.congress.gov/116/meeting/house/108844/witnesses/HHRG-116-ED00-Wstate-ReichM-20190207.pdf.
Tan, Su-Lin. 2022.“After 2 years of shipping snarls, things are starting to turn around” CNBC News, October 10.
Willingham, Caius. 2021. “Small Businesses Get a Boost from a $15 Minimum Wage.” Center for American Progress, February 25. https://www.americanprogress.org/article/small-businesses-get-boost-15-minimum-wage/.
Zahn, Max. 2023.“Here’s the difference between a ‘minimum wage’ and ‘living wage,’ and why it matters.” ABC News, January 10. https://abcnews.go.com/Business/difference-minimum-wage-living-wage-matters/story?id=96251007.
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