Weekly Briefing

Half-measures in response to hard times

The lagging minimum wage symbolizes the nation’s inadequate response to the struggling economy  

It’s the great Catch-22 of the last four years in American politics.

Forty-four months ago, the nation was in an economic freefall and, by all appearances headed for a second Great Depression. In response and much as in 1933, the nation turned to an energetic new administration that seemed determined to change the national course in order to right the ship of state.

Unfortunately, and unlike in 1933, the new administration did not enter office with an agreeable Congress standing at attention, waiting for directions. In 2009, the new administration was greeted by a skeptical and badly-divided Congress that was well-stocked with conservative members and well-heeled special interests determined to do whatever they could to blunt any attempt at a modern New Deal. When this reality was combined with the new president’s natural inclination to seek middle ground and compromise, the result was a lot less than it could and should have been.

Rather than a New Deal 2.0 – i.e. a robust and energetic stimulus of a scale that could have truly turned the economy around in relatively short order – the nation got half-measures that halted the freefall, but that lacked the “oomph” to get things headed energetically in the right direction.

This reality has, in turn produced the ironic two-pronged political Catch-22 that dominates so much of the current debate: 1) the administration is widely lambasted for the painfully slow recovery, and 2) the criticism comes overwhelmingly from the very same conservative ideologues and groups that fought tooth and nail against the kind of stimulus that would have made a more robust recovery possible.

As innumerable economists have noted in the years since, the U.S. confronted three basic scenarios back in 2009: a) The do-nothing Hoover approach; b) the energetic approach that FDR used at times to great success and abandoned at other times to his regret; and c) a kind of hybrid approach that would keep the economy out of the ditch but do little more.

In area after area since, it’s clear that the choice has been option “c.” Whether it’s tax policy, public employment, public spending, wages or even bank regulation, Washington has opted for the murky, messy and less-effective-than it-should-be middle.

The minimum wage

A new study released this week by the experts at the Economic Policy Institute –“How raising the federal minimum wage would help working families and give the economy a boost”shows how national minimum wage policy represents a classic case of this troublesome affinity for half-measures.

As the study reminds us, the minimum wage was last raised in July of 2009 to $7.25 per hour. Though a welcome bump, that figure was already inadequate at the time – especially in comparison to the historical objective to make the minimum wage a figure on which a breadwinner could actually support a household.

Consider the following: The U.S. minimum wage in 1968 was $1.60 per hour. If one adjusts that number merely to account for inflation, the minimum wage in 2009 should have been $9.86 – more than a third higher than its (then new and improved) actual size. While still short of a “living income,” such a number would have put billions of dollars into the pockets of people who needed it and would have spent it in the retail economy.

Now fast-forward to 2012. If one applies inflation to the 1968 figure of $1.60, the minimum wage should now be $10.53!

The EPI study, which looks at the possibility of raising the wage to $9.80 by July 2014 made several findings which demonstrate the benefits of even such an inadequate new hike. These include:

“-Increasing the federal minimum wage to $9.80 by July 1, 2014, would raise the wages of about 28 million workers, who would receive nearly $40 billion in additional wages over the phase-in period.

-Across the phase-in period of the minimum-wage increase, GDP would increase by roughly $25 billion, resulting in the creation of approximately 100,000 net new jobs over that period.

-Those who would see wage increases do not fit some of the stereotypes of minimum-wage workers.

  • Women would be disproportionately affected, comprising nearly 55 percent of those who would benefit.
  • Nearly 88 percent of workers who would benefit are at least 20 years old.
  • Although workers of all races and ethnicities would benefit from the increase, non-Hispanic white workers comprise the largest share (about 56 percent) of those who would be affected.
  • About 42 percent of affected workers have at least some college education.
  • Around 54 percent of affected workers work full time, over 70 percent are in families with incomes of less than $60,000, more than a quarter are parents, and over a third are married.
  • The average affected worker earns about half of his or her family’s total income.”

Such an increase would also prove enormously beneficial to the economy as a whole. According to Douglas Hall, a researcher with EPI, “Not only will it generate billions of new dollars for the economy while adding new jobs when we sorely need them, it will begin to address the wage stagnation working families have faced during the last four decades, while putting more money in their hands when they need it most.”

In North Carolina, approximately 646,000 workers would see their wages rise and an additional 269,000 workers would be indirectly affected as employer pay scales are adjusted upward to reflect the new minimum wage, according to the report.

Responding to the naysayers

Of course, according to opponents – most of whom also opposed other strong economic recovery and stimulus efforts – raising the minimum wage will harm business, discourage hiring and force more layoffs, particularly of young people. Decades of data, however, do not support this conclusion. To the contrary, the nation has experienced numerous periods in which essentially full employment has coincided with a much higher minimum wage.

Moreover, as the North Carolina Budget and Tax Center noted in its local release of the EPI report:

“Contrary to the perception that most minimum wage workers are younger workers, 92 percent of those who would be affected by a minimum wage increase in our state are at least 20 years old. Similarly, data on educational attainment of those who would be affected by an increase shows that only 20 percent of those affected have less than a high school degree, while 44.6 percent have some college education, an associate degree or more.”

In other words, raising the minimum wage to $9.80 (or even $10 or $11) is far from a radical proposal. It is, in fact, a time-tested, pro-recovery and anti-inequality tactic that has unfortunately, like so many other assertive and proven strategies, been ignored completely or watered down excessively.

Going forward

At the height of the New Deal, President Roosevelt said this to those who urged him to back down from strong action: “Do not any calamity-howling executive with an income of $1,000 a day…tell you…that a wage of $11 a week is going to have a disastrous effect on all American industry.”

Let’s hope that in the months to come, leaders in Washington are able to rediscover some of this combative New Deal spirit and move beyond the half-measures in which they have been mired for the last four years.