Thursday, February 20, 2014

Raising the Minimum Wage

President Obama, in his recent State of the Union (SOTU) speech, called on congress to raise the federal minimum wage and to start reducing the enormous inequality that has arisen in this country in the last 30 years. The people at the top of the economic food chain in this country are doing fantastically well right now, in fact they are better off financially than any similar cohort has been in the history of the world. Congressman George Miller (D-CA) and Senator Tom Harkin (D-IA) have introduced the Fair Minimum Wage Act of 2013, which would raise the minimum wage to $10.10/hr.

As Robert Reich has pointed out, this is a no-brainer. Republicans are claiming that raising the minimum wage will cost jobs. This is untrue. As Reich points out in the 2:29 video embedded below, minimum wage jobs are service sector jobs such as flipping burgers or changing the linen as a hotel maid. Business owners can easily absorb the cost of an increased minimum wage for pennies on the dollar, which they would pass on to customers. Furthermore, workers on the bottom rungs of the economic ladder spend everything they earn. The dollars spent on increasing their wages have an immediate stimulus effect.

Economists agree that raising the minimum wage would reduce poverty. Arindrajit Dube, an economist at UMass Amherst, has calculated that raising the federal minimum wage to $10.10/hr could lift 4.6 million people out of poverty. Of course, republicans are currently howling that any raising of the minimum wage will wreck the economy. There is no evidence to support this doomsaying. What we aren't told is that the real value of the minimum wage has been falling now for decades. This is illustrated by the following graph:

The blue points are the federal minimum wage by year in 2009 dollars. The maximum value occurred more than 45 years ago in 1968. The value was $9.86. This was a time of great economic prosperity in the US. The dollar values were computed by dividing wage values by the consumer price index (CPI) for a given year. The CPI was normalized to 2009. The blue curve is a lowess smooth computed in R with a "smoother span" of 0.4. Note that it has leveled off. The red data points are federal minimum wage data before the CPI adjustment. The first data point in 1938 was $0.25 after the minimum wage was instituted by Roosevelt. The 1938 value is the minimum value on either curve.

Looking at the graph above, one notices that the smoothed fit from 1938 – 1968 is quite linear. It's a simple matter to fit a straight line to these data using R and then extrapolate. Here is the result in graphical form. R-squared was 0.85 for the linear fit with lm.
Minimum wage in real dollars with linear fit 1938 – 1968

Where does this take us? If we had stayed on that linear growth curve, the minimum wage in 2013 would have risen to $18.10!

Reich has been hammering on economic inequality for years. He has put his arguments into movie form, Inequality for All. Watch the official trailer or youtube if you dare. Raising the federal minimum wage to $10.10/hr would put it back to where it was back in the 60s before it started falling. It's the right thing to do for the poorest Americans.

For the first graph above, the data and the R code used to generate it.

[Apr 7, 2014. Edited to remove an html display bug]

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