This paper examines the federal minimum wage in the United States from its origins in the Fair Labor Standards Act of 1938 through the scheduled 2009 increase. It covers the distinction between real and nominal minimum wage values, noting that the inflation-adjusted wage peaked in 1968. The paper then analyzes competing economic arguments about minimum wage's impact on unemployment, ranging from minimal job loss to significant increases. It also investigates why labor unions — despite few members earning minimum wage — strongly advocate for increases, and concludes with an empirical assessment of whether minimum wage laws effectively reduce poverty, drawing on research by economists Vedder and Gallaway.
A federal minimum wage was first set in 1938. The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting full-time and part-time workers in the private sector and in federal, state, and local governments (Wage and Hour Division). It is regulated by the U.S. Department of Labor's Employment Standards Administration. At first, this act covered only a few transportation and agricultural industries, but was later amended to include service workers and general laborers.
Originally set at just 25 cents per hour in 1938, the minimum wage has been adjusted 21 times over the years. Generally, it is adjusted in short phases over a few years. In recent years, as part of a three-step process to increase the minimum wage from the $5.15 rate that had been in effect since 1997, the federal wage was increased to $5.85 on July 24, 2007, and to $6.55 per hour effective July 24, 2008, with a further increase to $7.25 per hour scheduled for July 24, 2009. Workers are also required to be compensated at one and one-half times the regular rate of pay for overtime after 40 hours of work in a workweek.
Some states operate under a state minimum wage that is already higher than the federal minimum wage. In most cases, individual states have made larger adjustments to the minimum wage to account for the cost of living in their state and to better protect their citizens.
The real minimum wage is the wage adjusted for inflation using the Consumer Price Index, while the nominal minimum wage is the actual federal minimum wage in current dollars. Nominal minimum wage values have ranged from $0.25 per hour in 1938 to $7.25 per hour as of July 2009. Adjusting these wages to 2009 dollars reveals the real purchasing power of the minimum wage at different points in history.
Calculated in real dollars, the 1968 minimum wage would have been worth approximately $9.83 in 2007 dollars — the highest real value since the minimum wage was established. The real dollar value of the minimum wage declines during periods when Congress does not raise it fast enough to keep up with inflation. The period from 1997 to 2007 represents the longest extended period during which the federal minimum wage was not adjusted.
Heated debates among economists and policymakers about the effects of minimum wage on unemployment and the economy reflect the same basic arguments that were raised when the Fair Labor Standards Act was passed in 1938. The arguments against raising the minimum wage typically include claims about job losses and assertions that higher wages impose greater employment costs on businesses without producing measurable income benefits for workers.
Some also argue that minimum wage increases have widespread negative effects beyond unemployment. For example, higher minimum wages may encourage employers to cut back on worker training, which would hinder long-term career advancement in exchange for a modest increase in current income.
Supporters of raising the minimum wage argue that it will help low-income workers financially. They also contend that the current minimum wage level does not provide an adequate incentive for unemployed individuals to seek work. Furthermore, they argue that an increase in the minimum wage will have only a very minor impact on job losses, and that the positive effects outweigh the negatives. For instance, there is likely to be a slight spillover effect as businesses adjust other workers' pay to maintain internal wage structures.
While economic theory predicts that higher minimum wages will lead to higher unemployment, findings from recent studies appear mixed. On the low end, researchers have predicted that a ten percent minimum wage hike would cause only a one percent increase in the unemployment rate. On the other end, some researchers suggest that the same ten percent wage increase could raise unemployment by as much as ten percent. Other studies have concluded that minimum wage increases have no effect — or even a positive effect — on employment.
"Why unions advocate for raises despite self-interest"
"Empirical evidence on poverty reduction effectiveness"
The federal minimum wage has had no statistically significant negative or positive relationship to the rate of poverty (Gallaway and Vedder). While raising the minimum wage remains a politically appealing strategy for addressing economic inequality, the empirical evidence suggests that its effects on both unemployment and poverty are far less straightforward than advocates on either side often claim.
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