Thursday, July 23, 2009

Minimum Wage: Increase to $7.25 per hour is an economic stimulus that lifts all boats

The last phase of the increase to the Minimum Wage will happen this Friday. In 2006 there was a big push to increase the Minimum Wage at the state level, since the Federal Government hadn’t done so for more than 10 years. This effort was so popular that even in ruby red Virginia a Minimum Wage bill independent of the Federal law almost got through the Virginia General Assembly. State elected officials on both sides of the isle realized then that asking someone to live off of $5.15 per hour was unacceptable when the cost of living had eroded the livability and the purchasing power of the Minimum Wage. But, what is the acceptable standard that a person should be paid for their labor and does the increase in the Minimum Wage help or hurt the overall economy?

In an opinion article distributed statewide by John Sweeney of the national AFL-CIO and Doris Crouse-Mays of the Virginia AFL-CIO, the last phase of increasing the Minimum wage from $5.15 to $7.25 per hour will put just a little more than $2,000 per year in the pockets of 120,000 minimum wage earners in Virginia. That’s an infusion of $5.5 billion of consumer spending that happens immediately, according to the Economic Policy Institute.

Money spent by low wage earners doesn’t have the chance to see the inside of a savings account. It goes right back into the economy in order for people to survive that earn money at or just above this income level. They will see their yearly earnings go from $10,712 per year in 2006 to $15,080 per year of gross income. For an individual earning this minimum wage of $7.25 per hour in 2009, it will put them over the Federal Poverty threshold of $10,830 per year. If there are two people in the household, that level increase to $14,570 and for a household of three it goes to $18,310. Even at these levels, an individual and a family of two or three still have to rely on the social safety nets of the Federal Government.

One of those social safety nets is the Federal Food Stamp Program (or SNAP-Supplemental Nutrition Assistance Program). In order for an individual to be eligible for $200 per month of SNAP, their gross monthly income must be less than $1,127 and their net monthly income must be less than $876. For a family of two, monthly gross and net income must be less than $1,517 and $1,167 respectively to get $367 in SNAP. A family of three, monthly gross and net income must be less than $1,907 and $1,467 to get $526 in SNAP. Do Food Stamps help the economy? A recent study by the North Carolina Tax and Budget Center concluded that the $1.6 billion in SNAP payments were directly tied to generating more than $2.8 billion in economic activity.

Federal Housing Assistance through HUD (United States Department of Housing and Urban Development) is calculated at 50% of the median income for the area a person lives. So, if you live in a place like Northern Virginia, Richmond, Hampton Roads, and Charlottesville, there is no way that an individual can live off of $7.25 per hour even with $200 extra per month of SNAP and still expect to have a roof over their head.

So again, what is the acceptable standard that a person should be paid for their labor? If you take in these three parts: actual pay for work at the new Minimum Wage, SNAP payments, and any rental/housing assistance that exceeds 30% of an individual’s income, a person would need to be making a minimum wage of around $10 per hour to lessen the need to rely on Federal Social Safety Nets. So to answer the question of an acceptable minimum standard for a person’s labor, the Minimum Wage should be higher and at $7.25 per hour it is still insufficient to be able to afford to live in the United States.

The last question, if the increase in the Federal Minimum Wage will hurt the overall economy, the answer is no. It actually helps and the results of the North Carolina Tax and Budget Center also prove that money distributed to needy families for food assistance also helps to lift overall economic activity. Another way to look at increasing the Minimum Wage is that any increase of money put in the hands of low income earners benefits the entire economy and generates economic growth upward, which cannot be said for more money being put back in the hands of the wealthiest among us.


  1. While I'm sure most people are excited about the increase in minimum wage, there are still some factors to consider. Yes the cost of living has gone up so minimum wage should go up in direct proportion to it, but for every situation someone loses, and the losers in this case happen to be the younger generation. Because minimum wage has gone up, that means higher labor costs for employeers, which means that if they now have to pay a higher rate for the same job they are going to want more for their money which would mean they are going to want more skilled workers and generally that means your more skilled workers are older. Majority of people ages 16-24 work for close to minimum wage if not exactly minimum wage, so you are pushing them out. Joe's hot dog stand hires 16 year olds to sell hot dogs, but when minimum wage goes up he is either forced to fire his younger employees and hire more skilled workers or raise the price of his hot dogs in direct proportion to the wage increase because the hot dogs, buns, and condiments have all gone up in price because the grocery store has raised their price because they now have to pay higher wages also, and the effect trickles down until you find the your $2.10 increase doesn't really buy anything extra.

    I'm not opposed to the minimum wage increase, in fact I'm for it, it's very long overdue, but I'm simply playing a little devil advocate.

  2. Brittany, thanks for the comment. This is going to be hard for some businesses to absorbe considering the current economic recession. But, one thing that needs to be pointed out here is that older workers have been pushing out younger workers for these lower paying jobs since the recession started.

    There are those that feel having a Minimum Wage is unconstitutional, but the Constitution enables the Federal Government to regulate commerce and labor at many levels and also empowers Congress and state lawmakers to establish minimum standards in a very broad way. Why not wages?

    One of the bigger points that I was trying to get across was that with all the other forms of public assistance and the social safety nets we have in place, it comes out to be over $10 per hour in today's dollars that it takes for people to be able to live and afford the absolute basics. But, it also means that if people at the bottom of the income scale make a little more, it will be spent and it ripples upward through the economy. That isn't the case with putting money back in the pockets of the wealthiest among us. That money doesn't seep down far enough and doesn't make it all the way to the bottom of the income scale. Not that being wealthy is a bad thing, it just rings hollow when a rich person wines about paying more taxes when they have so much to start with and paying a little more will not hurt their standard of living in the least bit.

  3. Hate to break it to you, Barry, but the Commerce clause is only good for foreign commerce, interstate commerce, and commerce with Indian tribes. State minimum wages do comply with the Constitution, but the federal minimum wage does not. And you must not be familiar with the equation profit = revenue - cost. In order for businesses to profit, they need to make more than they have to pay, and when the minimum wage goes up, they have to pay more, so they have to raise prices. And labor is far from the only expense involved in running a successful business. They also have to pay utilities for all locations, land taxes, supplies, advertising, web design, if they want to build a new location that will cost them, any loans they needed to start the business, shipping, and more.
    Workers don't make low wages because businesses don't care, they make low wages because they're so numerous that businesses can't afford to pay them all good money.
    And the minimum wage is especially bad for small businesses that don't make that much money to begin with. If you have a business that only makes $75,000 per year and has 20 employees, each of whom it's required to pay $10/hour, then that's $200/hour. Add that to all the previous expenses I named and that really takes a toll on the business.
    Oh, and you may also be forgetting that income tax is done as a percentage, which means that even if we had a flat income tax, people making more money would still be paying more to the IRS than would be people making less money.

  4. Well, I haven't commented on the minimum wage in a while. Lots of people at this point would take any wage.

    As to the Minimum Wage being constitutional, yeah, it's constitutional. Many, many years ago there were attempts to prove that the federal government didn't have the power to set a minimum wage and they were defeated every time.

    The issues of labor and wages fit very nicely under the Commerce Clause under Artile 1 Sec. 8[1], especially when providing for the "general welfare of the United States. In [3], which you refer to, commerce between the states is interstate commerce and if a person has a business in this nation, it is next to impossible to be disengaged from interstate commerce completely. Congress has the power to regulate commerce, thus they have the power to set regulations and establish standards (which have to be uniform throughout the United States). Article 1 Sec. 8 is filled with what powers Congress has over Commerce, Trade, Finance, Taxes, and how they are able finance the operation of the Federal Government. So hate to break it to you, the Commerce Clause doesn't end at paragraph [3].

    Now, as for your theoretical small business. If there's a small business out there that has income of $75,000 per year and 20 employees and pays them $10 per hour for 40 hours a week, I'd like to see it. Based on the numbers you gave, that $200 for one hours work from 20 employees is accuate enough. But take that to 40 hours it comes out to be $8,000 for one week's work. If this theoretical small business did this for a whole year (52 weeks) that comes out to be $416,000 of payroll. Even if they were all part-time working 20 hours per week, that still comes out to be $208,000 of payroll. Sorry, but your math doesn't work out. No need to worry about the expenses for power, rent/mortgage, the business is payroll heavy.

    By the time the minimum wage went up to $7.25 per hour, most small businesses were paying well above that, closer to $8.00 per hour. You are clearly coming at the issue from the side of the employer/small business. That's fine. But the point of the post and the reason for the minimum wage is workers, employees, have to pay most of the same things that employers do (food, fuel, shelter, healthcare, taxes) just to live. Its called Cost of Living. If people can't be paid enough just to live, then how is the small business owner going to have customers if they can't afford to buy that businesses goods or services?

    By the way, I'm familiar with the equation. It also goes wages - expenses = net income/savings/disposable income.