Minimum Wage Public Policy: Efficiency Wage Theory & Reform

Introduction

Public policy on the minimum wage in the United States has shifted focus in recent years. Many members of the public and policymakers have sought to raise the national minimum wage to $15 per hour—an amount widely regarded as a decent living wage that may help those in or near poverty. The minimum wage in the United States was first introduced around the time of the Great Depression, when the standard rate was 25 cents per hour. To match the purchasing power of those 25 cents today, the minimum wage would need to be approximately $10 per hour.

Progress has been made over the last several years with regard to increasing the minimum wage. Some states, like California, have already adopted legislation to gradually raise the minimum wage to $15 in the coming years. New York City and Seattle are not far behind. Still, not enough has been done to secure this goal for the millions of impoverished Americans who would benefit from it.

By examining efficiency wage theory and drawing on qualitative research, this paper aims to provide clarity on the origins of the movement toward a higher national minimum wage and the efforts being made at the local and state levels to improve wages. This qualitative study examines research articles and literature from the past four years to assess whether sufficient changes have been made to deliver the promise of higher minimum wages and what impact higher minimum wages have already had in countries that have adopted them. The paper also includes an examination of an organization working to change public policy on minimum wage. Advocacy groups such as the Raise the Minimum Wage campaign, founded by the National Employment Law Project, have made significant progress in this area.

The origins of the United States' first national minimum wage lie in the Fair Labor Standards Act of 1938, a legislative measure intended to curtail "labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers" (Royce, 2015, p. 134). The act was passed near the end of the Great Depression (1929–1939) and was meant to provide a living standard for Americans through a set minimum pay for all workers in legal employment. As Royce details, the minimum wage law is not indexed to inflation, and the only way to increase the minimum wage is through approval by Congress and state and local representatives.

"The minimum wage established a floor of hourly earnings. It is not indexed to the rate of inflation, however, so its real value declines over time as the cost of living increases. Whether the minimum wage is raised, how often, and by how much is a matter decided by Congress and state and local representatives" (Royce, 2015, p. 134).

This explains why the minimum wage in the United States has taken so long to increase. Because there is substantial resistance from various forces concerning the national minimum wage, any progress has been slow. If the United States were to adopt a higher minimum wage, it could prove beneficial to the poor in more than one way—including through improvements in health, particularly as it relates to healthcare and infant mortality. A recent study analyzed the effects of a higher national minimum wage on infant health outcomes:

"Across all models, a dollar increase in the minimum wage above the federal level was associated with a 1% to 2% decrease in low birth weight births and a 4% decrease in postneonatal mortality. If all states in 2014 had increased their minimum wages by 1 dollar, there would likely have been 2,790 fewer low birth weight births and 518 fewer postneonatal deaths for the year" (Komro et al., 2016, p. 1514).

Aside from improving outcomes for newborns, a higher minimum wage can also improve poverty indicators for one of the most affected populations: single mothers. Since 2009, the federal minimum wage has not increased. If it does, it may lessen "earnings poverty for single mothers, who are disproportionately represented among minimum wage workers. The Congressional Budget Office (2014) estimated that a $10.10 per hour wage would raise earnings for 16.5 million workers and reduce poverty by about 900,000" (Danziger et al., 2015, p. 241). This suggests that while employment might decrease by approximately 0.3%, the quality of life for millions of Americans would improve.

Overall, research on higher minimum wages points to multiple benefits. Policies thus far have only produced small changes, leading to modest progress in a handful of states—most notably California, one of the first to adopt a living wage policy of $15 per hour. Yet with the last change in the federal minimum wage occurring in 2009, much remains to be done in terms of public policy reform. Public policy must shift toward identifying the potential outcomes of raising the national minimum wage.

Problem Statement and Significance of the Study

The findings of this study aim to provide clarity regarding public policy on minimum wage in the United States. By addressing the concerns of organizations advocating for a higher national minimum wage and examining the opposition to such an increase, the study seeks to demonstrate the need for a higher minimum wage and to outline the steps being taken to slow or accelerate progress toward that goal. Several articles note that benefits of increasing the minimum wage—framed as "performance pay" or a "living wage"—are used by advocates as evidence for changing policy at the federal, state, and local level. As one study notes, "performance pay is associated with increased productivity only when it is coupled with a high-wage policy. This holds for individual-based performance pay, group-based performance pay, and profit sharing" (Jirjahn, 2016, p. 507).

This leads to the significance of the study. Its purpose is to discover the efforts of the public through advocacy organizations and to outline the progress made toward changing public policy on minimum wage. Progress has been made in states like California, with potential changes coming to cities like New York City and Seattle. These represent meaningful advances at the local and state level. However, no progress has been made at the federal level toward a higher national minimum wage.

This study may provide information needed to continue research on what is halting progress at the federal level. As it currently stands, the national minimum wage does not match the expenses of everyday life for most Americans, meaning the poor are more severely impoverished than in previous decades. "In 2000, the income of the average poor family fell $7,732 short of the poverty line, and by 2012, the poverty gap or 'income deficit' of families in poverty had risen to $9,785" (Royce, 2015, p. 9).

Parameters of the Study

The primary concern of this research is to examine current efforts by the American government to adopt a higher national minimum wage. In attempting to account for factors that may drive or impede progress toward this goal, the study raises three interrelated questions:

1. What opposition does the United States government face in relation to adopting public policy for a higher minimum wage?

2. Will a higher minimum wage help those in poverty?

3. What have been the effects of adopting a higher national minimum wage in other countries?

The study will address these questions through existing literature and information provided by organizations advocating for higher minimum wage policies. The aim is to provide a better understanding of what changes the public seeks in relation to the national minimum wage, what forces may be slowing or hastening progress, and what is currently being done at the government level.

Some countries have already adopted higher minimum wages. Germany, for example, introduced a national minimum wage for the first time, and the changes have been met positively, with the country experiencing economic stability and growth (Liu, Hyclak, & Regmi, 2015). Literature generally points to a higher national minimum wage providing more advantages than disadvantages for businesses and the overall economy. As one source notes, a higher minimum wage "reduces voluntary labor turnover and reduces the incentives to shirk on the job and thus the number who are discharged; the number of separations will decline. A decrease in separations will also mean a lower number of job vacancies" (Liu, Hyclak, & Regmi, 2015, p. 18). The qualitative study will apply efficiency wage theory to support the case for public policy in favor of a higher national minimum wage.