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We hear a lot these days about the minimum wage, that it is not a living wage and hasn’t been increased since 2009. Both are true. But there is more to it than that.
I am not trying to make a case for or against raising the minimum wage. However, there are consequences that proponents seem to ignore or gloss over.
I do think the answer to long-term financial security is not found in raising the minimum wage rate, but in getting out of a minimum wage job through education, job skills and adding value to an employer – easier said than done for many, but perpetuating the current state by chipping away at minimum wage limitations is not a solution in my opinion.
Minimum wage workers make up a small percentage of hourly paid worker and even smaller of all workers, but that is little consolation if you are one of them.
Thirty states and the District of Columbia have a minimum wage above the federal minimum wage.
Some people call for a minimum wage that provides living wage, but I don’t think that is possible. According to the MIT living wage calculator, a minimum wage of $30.71 is necessary in San Diego, Ca. for a single person. The actual rate is $16.50 while fast food workers have a minimum of $20.00 per hour.
In the county where I live in NJ the living wage for a single person is said to be $24.94 while the actual minimum is $15.49, but for a couple with a child it is $41.97 which equals $87,297 a year.
Is it practical to assume we can pay those rates to a hotel housekeeper or a restaurant dishwasher? The median salary for teachers in NJ is about $80,000 at the high school level, less at lower grades.
It is even more complicated because of salary compression. Simply put, if you raise the minimum, those earning just above that will expect increases as well and on up the pay scale. In addition, the cost of wage increases is not limited to cash, but anything aligned to wages-employer FICA taxes for sure, but other benefit costs too for some employers.
The other possible complication is that for some workers a pay raise would make them ineligible for social safety nets thus incurring a net loss.
Who are minimum wage workers? According to the Bureau of Labor Statistics:
Age. Minimum wage workers tend to be young. Although workers under age 25 represented one-fifth of hourly paid workers, they made up 44 percent of those paid the federal minimum wage or less.
Sex. Among workers who were paid hourly rates in 2023, about 2 percent of women and 1 percent of men had wages at or below the prevailing federal minimum.
Race and Hispanic or Latino ethnicity. The percentage of hourly paid workers with wages at or below the federal minimum differed little among the major race and ethnicity groups. Among White, Black, Asian, and Hispanic workers, about 1 percent earned the federal minimum wage or less.
Education. Among hourly paid workers age 16 and older, about 2 percent of those without a high school diploma earned the federal minimum wage or less, compared with about 1 percent of high school graduates (no college), those with some college or an associate’s degree, and those with a bachelor’s degree and higher.
Marital status. Among never-married workers, who are younger than married workers on average, about 2 percent of those who were paid hourly had wages at or below the federal minimum wage, compared with less than 1 percent for married workers and for workers who were widowed, divorced, or separated.
Full- and part-time status. Among part-time workers (people who usually work fewer than 35 hours per week), about 2 percent were paid the federal minimum wage or less, compared with about 1 percent of full-time workers.
Occupation. Among the major occupational groups, service occupations had the highest percentage of hourly paid workers earning at or below the federal minimum wage, at about 4 percent. Nearly 8 in 10 workers earning the minimum wage or less in 2023 were employed in service occupations, mostly in food preparation and serving-related jobs. For many of these workers, tips may supplement the hourly wages received.
Just to clarify, the living wage of $41.97 in Esssex County, NJ for a couple with a child is for only 1 of the adults working. If both adults are working the living wage is $25.69 for each adult which translates to a household income of $106,870. Childcare expense is the main reason why this is higher than the living wage with only one adult working.
The linked page with the living wages also lists typical annual salaries. For lower level jobs the salaries are $40k-$42k which is about 75%-80% of the living wage. Of course, those are averages while the living wage is presumably a minimum.
This is a tough one Dick. I’ll be a bit of a devil’s advocate here. In my opinion, the federal minimum wage is a joke. It should be higher, and adjusted for inflation. The idealistic me thinks a living wage would be wonderful. The realist me knows a living wage is not practical.
You are correct about the loss of certain social safety nets. It’s important to help citizens in need, still, some taxpayers calculate exactly how much income they need to earn in order to max out on the benefits and then stop working at that point. It also seems as if some employers are relying on the federal government to supplement low pay and provide health insurance for their underpaid workers.
For example: According to AI the average fast food employee earns about $29K per year, for a 40 hour work week. I suspect the wages for many working in the retail sector are similar. Based on those earnings, a single parent with three dependents would be eligible for approximately $6,500 from the Earned Income Tax (Refundable) Credit, and up to $1,700 for each child via the additional child (refundable) tax credit.
Many HumbleDollar readers will be unfamiliar with “refundable credits”. A Refundable Tax Credit is a tax benefit that is paid out to you as a refund even if it’s more than the amount of tax you owe.
In my example, that single parent with three eligible kids could receive over $10,000 come tax time. This taxpayer also earns less than 138% or the poverty level, making him/her and the kids eligible for Medicaid.
While higher wages would indeed contribute to salary compression, they would relieve some of the burden on the federal government (and the budget deficit) to provide some of the social safety nets.
Another point about the tax credits I mentioned, is that they are not subject to cliffs like other things in the tax code. Rather, they are gradually phased out as a person’s income rises. For example, another $3 in income may only reduce a refundable tax credit by $1. In theory this should give workers an incentive to keep working.
Excellent analysis. There is no discussion of those earning below the minimum wage because of tips. I’d like to know what the statistics would look like if we were to remove them from the analysis.
Do you know if the concept of a living wage assumes that someone earning this amount does not recieve any gov’t assistance?
The living wages that Dick cites in the post would greatly or totally reduce refundable tax credits and eligibility for Medicaid.
I don’t see a reference to that on the MIT site, but it does list expected expenses in each category.
While the concept of a living wage is to eliminate the need for government assistance, in practice, very few countries (if any) have translated that into reality. The Nordic countries probably come closest in implementing the concept.
I don’t feel it’s realistic to say people should be using education, etc., to get themselves out of a minimum wage job. In the final analysis, there’s always going to be a subset of jobs in this category that someone has to work by choice or necessity. I don’t think it’s unreasonable to target those jobs within this subset with a real-world level of wage compensation, if for no other reason than simple human dignity.
If everyone followed the advice to “get out of” these jobs, the economy and society would grind to a halt. These are not jobs people fail to leave; they are necessary roles that someone must perform.
Temporarily‼️. Not a life-long occupation. I started in a minimum wage job.
I really don’t want temporary staff working with old folks in nursing homes and kids in childcare nurseries.
Don’t mean temporary staff, but rather that people move on from a MW wage job to better things. If you work in a MW job all your life it’s pretty certain you will be near poor as well.
I totally get where you’re coming from. Maybe it’s different in the US, but in the UK, nursery and elderly care are primarily minimum wage jobs with a few staff who have higher education in senior roles. Personally, I think they’re both vocational careers where length of service and experience are essential—not positions that should be filled by people just treading water until better opportunities come along. Essentially these jobs should offer a proper living wage to retain experienced staff, not treated as minimum wage make work jobs.