Part of newly inaugurated US president Joe Biden’s $1.9 trillion pandemic relief plan includes a hotly debated measure: an almost doubling of the US federal minimum wage to $15 an hour.
“No one working 40 hours a week should live below the poverty line,” Biden said in a Jan. 14 speech. “If you work for less than $15 an hour and work 40 hours a week, you’re living in poverty.”
For more than a century, economists have debated the merits of minimum wage increases. The debate is now back in the spotlight amid the renewed attention on inequality: Does a minimum wage lead to better lives or fewer jobs? Even if a minimum wage is the best policy, is a national minimum wage the best approach to reducing inequality?
Congressional Republicans have generally opposed raising the minimum wage, saying it would hamper an economic recovery. But Biden is confident the issue is moving beyond partisan politics. He noted that Florida, a state that did not vote for him in the Nov. 3 election, at the same time approved a ballot measure to increase the state’s minimum wage to $15 an hour by 2026. Now, roughly 40% of the US workforce is in cities or states with minimum wages set to climb to $15 or more.
“People tell me that’s going to be hard to pass,” Biden said. “Florida just passed it. The rest of the country is ready to move as well.”
That Biden is making the federal minimum wage a clear priority will be an early test of his pledges to work across both aisles. In the 50-50 US Senate, a federal bill would need the support of at least 10 Republican senators, unless it gets put through the legislative process known as budget reconciliation, in which case it could pass the Senate with a simple majority.
In 2019, the US House of Representatives passed a bill to gradually lift the federal minimum wage to $15 an hour by 2025, but the Republican-controlled Senate refused to take it up. The federal minimum wage has remained at $7.25 since 2009.
How far minimum wages have come
The first wage floors were set in New Zealand and Australia in the 1890s, with minimums specific to industries rather than nationally. Massachusetts, in 1912, became the first US state to pass a minimum wage law as a way to protect women and child laborers from discrimination. Thirteen more states followed suit over the next decade, creating a patchwork of minimum wage regulations that were specified by gender, age, or industry. It was not until 1938, under US president Franklin D. Roosevelt and the Fair Labor Standards Act, that a federal minimum wage was established. It was set at 25 cents an hour and would exclude certain industries like agriculture and domestic services.
While economists have long debated the effects of minimum wage, strong empirical analysis did not appear until the 1970s. In the 1980s, conventional wisdom said minimum wage had a negative impact. But in 1992, New Jersey raised its minimum wage from $4.25 to $5.05, and the paper that the economists David Card and the late Alan Krueger wrote about it the following year caused a stir in economic research circles. Card and Krueger compared the labor market outcomes for New Jersey’s fast-food workers with fast-food workers in nearby eastern Pennsylvania and found no increase in unemployment. The paper would be challenged; critiques include the argument that workers who live near a state border could find employment across state lines without relocating their residence, throwing off the data comparisons. In any case, the matter was hardly settled.
Krueger stuck to his argument, though. More than three decades after the New Jersey study, in a 2015 New York Times op-ed, the late economist argued that raising the US minimum wage to $12 per hour by 2020 “would not have a meaningful negative impact” on employment:
While some employers cut jobs in response to a minimum-wage increase, others find that a higher wage floor enables them to fill their vacancies and reduce turnover, which raises employment, even though it eats into their profits. The net effect of all this, as has been found in most studies of the minimum wage over the last quarter-century, is that when it is set at a moderate level, the minimum wage has little or no effect on employment.
Other economists have been changing their minds about minimum wage as more research has found that modest increases have minimal impact on employment.
But steep increases remain controversial. In one of the rare studies on the impact of high minimum wages, researchers in 2018 looked at what happened in Seattle—the first major US city to raise its minimum wage to $15—and found that an initial increase to $11 seemed not to have much of an impact on employment. But the second increase, a year later, to $13, led to a sharp decline in both jobs and hours worked.
Is the minimum wage the best way to reduce economic inequality?
In 1968, the minimum wage was more than 52% of the median wage for full-time US workers. By 2014, that ratio had declined to 37% percent. “If the minimum wage had kept pace with price increases since 1968, by 2014 it would have stood at $9.54—about 32 percent higher than its actual level,” notes a 2015 report from the Economic Policy Institute, a left-leaning think tank.
“That is where the minimum wage has the power to reduce inequality, because it can lift up the floors,” says David Cooper, a senior economic analyst at the Economic Policy Institute. “The folks who were either just getting started or who have been stuck in low wage jobs for a long time are a little closer to the middle class than their counterparts have been for the last four years.”
But it’s unclear how evenly the benefits would be distributed. A 2019 analysis by the nonpartisan Congressional Budget Office found that increasing the minimum wage nationally to $15 by 2025 would boost the wages of 17 million Americans but would lead 1.3 million to lose their jobs. The report also found that employment would fall disproportionately among part-time workers and adults without a high school diploma.
Some economists instead propose that expanding the earned income tax credit, which refunds taxes owed by low-income families, better targets households struggling most. In 2019, the average earned income tax credit was $2,476, but an estimated 20% of eligible workers did not claim the credit.
Versus a minimum wage hike, a tax-credit increase has the added benefit of not being a direct hit to small-business owners.
“The largest contributor to inequality has been the upper tail running away from everyone else,” notes David Neumark, an economist at the University of California-Irvine, in an email response to Quartz. He argues that the burden of a minimum wage is on smaller businesses that aren’t necessarily owned by rich people. “Put differently,” he wrote, “why address inequality by redistributing from owners of small shops, restaurants, etc., and not from people making a killing in finance, law, etc.?”
Others argue that earned income tax credit pairs well with wage increases.
Do we even need a federal minimum wage?
In 2000, 11 US states had wage minimums above the federal standard. Today, 29 states and the District of Columbia, which together account for half the US population, have minimum wages set above the federal minimum of $7.25 an hour. That includes a growing number of states with minimum wages now at $15, or close to it, covering workers who in some cases live far outside of the country’s most expensive cities.
There’s an argument that decisions on increases should come from state governments that know their local economies best. But some jurisdictions are thinking more locally than that—53 US cities and counties now have their own minimums, up from just five in 2012.
The layering of state and local minimums has added to the perception that the idea of a federal minimum wage is somewhat obsolete. But if nothing else, the attention on the national standard has prompted a national debate about it—and in the face of the pandemic and its toll on frontline workers, the rhetoric has been shifting. The National Restaurant Association, which has staunchly been against raising wages, told Quartz in December that “[w]e’re ready to have a conversation about how to create an environment where people can make the industry their forever jobs.”
Instead of supporting a federal $15 minimum wage, Doug McMillon, CEO of Walmart, which has 1.5 million workers, recently called for wages above the current federal minimum but stopped short of supporting a national $15 minimum, saying wage increases should take into account “geographical differences” and small businesses. Amid criticism from labor advocates, Walmart has upped its minimum pay but still lags behind retailers such as Target and Amazon, which have set $15 minimum wages for their US employees.