Common sense

I am not an economist. My knowledge of economic issues is limited to what I can glean from newspaper articles. But I would like to think that I have at least a little bit of common sense. So when I am confronted with the fact that the last time Congress increased the federal minimum wage was 2009, and that it has not touched the federal minimum wage for tipped workers in over 20 years, my common sense tells me something has to change.

Congress first passed the Fair Labor Standards Act in 1938 in the wake of the Great Depression in order to keep America’s workers out of poverty and stimulate their purchasing power. The federal minimum wage for worker’s engaged in interstate commerce was then set at $0.25 an hour. Over the course of the next 30 years, the minimum wage for most workers was increased to $1.60 an hour. Accounting for inflation, that would be equivalent to $10.74 an hour in 2013 dollars. In 1968, 3.6 percent of workers were unemployed; last month, 7.3 percent of workers were out of work.

Congress has not raised the federal tipped minimum wage since 1991 when it was set at $2.13 an hour, about half the federal minimum wage of $4.25 an hour. If tipped minimum wage had increased with inflation, it would stand at $3.65 an hour today, a 70 percent increase.

The United States ranks 11th in minimum wage among member states of the Organization for Economic Co-Operation and Development—behind Australia, New Zealand, Canada and several Western European countries. A full-time worker who earns $7.25 an hour has an annual income of $14,500; the federal poverty level is $11,490 for an individual and $15,510 for a family of two. As President Obama pointed out in his State of the Union Address this year, “a family with two kids that earns the minimum wage still lives below the poverty line.” In short, it seems as though the Fair Labor Standards Act is no longer accomplishing its purpose. The federal minimum wage is not keeping America’s workers out of poverty.

The population that would benefit from a federal minimum wage increase to $10.10 an hour by July 2015 does not conform to the stereotype of the middle class teenager who wants to save money to buy a car. Women would constitute 56 percent of those benefitted by the increase, and at least 88 percent of workers benefitted would be at least 20 years old. Moreover, about 44 percent of those who would be affected have at least some college education. Most tellingly, the average affected worker earns about half of his or her family’s income.

According to estimates by the Economic Policy Institute, the Fair Minimum Wage Act of 2013 would generate $32 billion in new economic activity, which would translate into 140,000 new jobs. When low-wage workers benefit from a minimum wage increase, they start spending more at local businesses, which in turn stimulates the development of the local economy.

Some economists have argued that increasing the minimum wage will increase unemployment because it will simply be too expensive for small businesses to hire low-wage workers. This argument seems to ignore the fact that the cost of a minimum wage increase for the business owner can be passed on to the consumer by raising the price of the product. A simple examination of the cost of a Big Mac in countries with higher minimum wages demonstrates that effect. In New Zealand, for example, where the minimum wage is NZ$13.50 (about $10.81), a Big Mac costs NZ$5.20 (about $4.16). The average price of a Big Mac in the United States is $3.99.

Last week, alongside lower-than-expected job reports for August, we received good news about the American auto industry. After General Motors teetered on the brink of death a mere five years ago, the Wall Street Journal reported on Wednesday that U.S. car sales had soared to pre-slump levels. This seems like fantastic news. Americans are going back to one of their stereotypical obsessions: cars. But we aren’t out of the woods yet. There are still 3.6 million workers, approximately 4.7 percent of all hourly-wage workers, who are paid at or below the federal minimum wage rate. My common sense understanding of economics indicates to me that raising the federal minimum wage is an essential component of our economic recovery.

Joline Doedens is a second-year law student. Her column runs every other Wednesday. Send Joline a message @jydoedens.