August 4, 2009

Why the Minimum Wage Increase Really Won't Matter Much

The federal minimum wage went up to $7.25 in July. Thats a 70¢ increase from the previous $6.55 rate. I've seen a number of blog articles talking about the minimum wage increase and speculating on what impact it will have. People are asking such questions as : Is this the right time? Will it hurt the economy?

Few people actually make minimum wage nowadays and the of the increase is relatively small compared to the economy as a whole. Because of this my conclusion is that : The increase in minimum wage to $7.25 is going to be negligible on the economy.

Very few people make minimum wage
First of all the state minimum wage is already higher than federal minimum wage for most of the population. Only 22 of the 50 states representing about 40% of the population are below or at federal minimum wage before the increase to $7.25. The report from the BLS on Characteristics of Minimum Wage Workers : 2007 has a lot of info on the minimum wage.

Key point : Only about 2-3% of the population makes minimum wage.

Here is a chart of the % of the workforce at or below minimum wage over time:

As you can see over time fewer and fewer people work for the minimum wage. The overwhelming vast majority of workers make more than the federal minimum wage.

Additionally a Large % of Minimum Wage workers are part time
If you look at the total population of workers at or below the minimum wage a full 50% of them are working part time. And about 1/3 of the part time workers work less than 20 hours a week. You can find this data from the BLS report table #9.

The total increase is around $2.2B

Looking at the BLS data with the total # of people at minimum wage and the amount of money they would make the increase in wages is around $1.5-2.5B total per year. Making rough estimates of the total impact, I come out at $2.2B. If there are 1.7M people making minimum wage and they work an average of 35 hours a week then an additional 70¢ per hour would be $42 million in wages per week or about $2.2 billion for a year. Keep in mind that this is a rough estimate, but I am confident its in the right ballpark.

Lets compare

Every day we get news about things like Exxon record profits over $40B for a year or GoldmanSachs executive bonus compensation over $6B for a quarter. Those are just 2 companies among many. Yet those numbers dwarf the amount of wage increase from the minimum wage raise. Consider the broader picture, the personal income for US citizens in 2007 was over $11 trillion dollars. $2.2B of $11T is just 0.02%.

Here is how the minimum wage increase in total dollar impact stacks up to some other numbers.

You can see how the items on the right side are basically flat. Thats because something like the $2B from minimum wage increase is too small to even register on the chart. Its like comparing a foot to a mile.

This is why I think the increase in the minimum won't really have a real noticeable impact to the economy as a whole. Proportionally its just a small drop in a giant bucket.

This is of course not to say that a 70¢ raise won't matter to the people receiving it or to certain employers paying those wages. Individually this change will make a difference in some lives.

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