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The American Dream relies on the idea that anyone in the U.S. has the opportunity to become prosperous and climb the social ladder if they just work hard enough.
But is that true for all working people? Certainly, those who are paid the federal minimum wage can’t really prioritize building personal wealth at $7.25 an hour.
In many places, that’s not even enough money to cover essentials like food and rent.
When the federal minimum wage was established in the 1930s, it was considered a living wage: the income of one worker was enough to sustain their entire family. But that only lasted for a few decades -- the minimum wage hasn’t really budged, especially in the last 20-30 years.
And, unfortunately, you can’t say the same about inflation. Or the cost of living.
So, why hasn’t the federal government prioritized keeping the minimum wage as a living wage for the American people? And states can implement their own minimum wage laws, but is that enough?
We’re going to take a look at the history of the minimum wage, where it could be now and why it is so low still today.
History of minimum wage
As part of an effort to get the nation back on its feet at the end of the Great Depression, the U.S. government decided to improve working conditions for employees who were being exploited.
In 1938, the federal minimum wage was established for some, primarily those working in the manufacturing and industrial sectors. Over time, the legislation was amended to include workers from other sectors and to increase the wage amount.
Minimum wage means exactly what it sounds like: The lowest legal hourly wage that an employer can pay an employee. The federal government sets the minimum wage nationally, but individual states can set their own minimum wage requirement, though it cannot go below the federal floor.
When minimum wage laws were created, today’s expert David Cooper says the rate was envisioned as a living wage. In the late 1930s, one individual receiving minimum wage could likely afford to shelter, feed and care for themselves and their family.
Between 1938 and the late 1960s, the federal government raised the minimum wage at a fairly consistent pace with the nation’s productivity level -- meaning that as the workforce was able to produce more money, the minimum wage was being raised at roughly the same rate, Cooper said.
Economic analyst Cooper says that during the 60s, the federal government had published its first analysis of the poverty line in the U.S., and lawmakers were examining what it took for people to afford basic needs. That information was used to determine the minimum wage, which was intended to keep people above the poverty level.
By the end of the 1960s, however, minimum wage laws were not given the same consideration. According to our expert, the government was still keeping tabs on poverty and basic needs, but competing interests compelled lawmakers to stop updating the minimum wage.
Data shows that the federal minimum wage increased during the 1970s, but inflation was also rising significantly at that time -- essentially rendering the wage stagnant throughout the decade. Conditions did not improve in the 1980s, when inflation continued to rise, but the federal government chose not to adjust the minimum wage in response.
The minimum wage was slightly raised at a few points in the 90s, and then a few times in the 2000s -- and then it stopped.
That’s right: The federal minimum wage has not increased since 2009. The rate has rested at $7.25 per hour for more than a decade.
When adjusted for inflation, the federal minimum wage was actually 33% lower in 2020 than it was in 1970. When adjusted for inflation, minimum wage reached its peak in 1968.
Here’s a look how minimum wage has changed throughout U.S. history, and how it compares when adjusted for inflation.
The federal minimum wage for tipped employees is currently $2.13 per hour, as long as a person earns at least the federal minimum wage with that rate plus tips.
So, what should the minimum wage be now?
If the federal minimum wage was raised at a consistent rate alongside productivity levels -- like it was in the 1960s -- the minimum wage would be around $23-$24 per hour today, Cooper said.
“In the late 1960s, minimum wage was equal to about half of the median wage,” Cooper said. “Today, it’s equal to less than one-third of what a typical middle-class worker in the economy makes.”
States set their own limit
As mentioned earlier, states can -- and many do -- set their own minimum wage.
Our expert says that a couple states have actually set their minimum wages below the federal wage, but those laws are superseded by the federal minimum wage. Rather, most states that set their own wage limits typically have a minimum wage that is higher than the federal limit -- though, not always by much.
The highest minimum wage in the U.S. to date is $15.90 in Washington, D.C. The second-highest is in California, where both hourly and tipped workers earn a $15 minimum.
Here are some more examples from minimumwage.com:
Here in Michigan, the wage is currently set at $9.87 per hour -- up from $9.65 as of Jan. 1. The state approved Michigan’s Improved Workforce Opportunity Wage Act in 2018, and that establishes the annual schedule and wage increases.
There is not a one-size-fits-all method for minimum wage. The numbers obviously vary, sometimes significantly, state-by-state, and even within individual jurisdictions within a state. The Economic Policy Institute (EPI) says that 40 localities in the U.S. have set minimum wages higher than their state’s minimum wage.
Some jurisdictions have even developed a plan that automatically raises the minimum wage as inflation increases. This process is called indexing.
Indexing and Michigan
According to the EPI, minimum wage is indexed in 18 states and in Washington, D.C., “meaning it is automatically adjusted each year for increases in prices.” Cooper says that by indexing minimum wage, the hourly salary never loses its value -- and it’s written into law that the wage will rise by a certain amount depending on a specific formula, so politicians are not deciding the number.
In Michigan, a 2018 ballot measure was proposed to increase the minimum wage to $12 per hour by 2022, then establish an indexing plan that would automatically raise the wage annually alongside any rise in inflation.
According to today’s expert, polling showed that Michigan voters supported the proposal to establish an indexed minimum wage, and that the ballot measure would have passed. However, the state’s Republican-controlled Legislature stepped in and upped the minimum wage, effectively undercutting the measure, Cooper said.
Michigan lawmakers voted to increase the minimum wage to reach $12.05 per hour by 2030.
Over the last year, Democratic U.S. lawmakers and the Democratic president unsuccessfully pushed to raise the federal minimum wage to $15 by 2025, failing to get support from Republican lawmakers.
Why does minimum wage matter?
A portion of U.S. workers, especially those living in or near the poverty line, are paid the minimum wage -- which they rely on as a living wage, even though it doesn’t serve as such.
Individuals earning the minimum wage are more likely to work more than one job, or rely on government assistance to help keep them afloat. Cooper says that workers who have two jobs may be less productive at a job if they’re constantly worried about their financial and employment situation. And those businesses experience a higher turnover rate.
And for these workers, especially those with children, it is nearly impossible to find time or money for education that could lead to a new job and building wealth.
Research shows that if the minimum wage was raised to $15, more than 60% of people who are working and are in poverty would have seen a raise. The legislation would have also reportedly lifted 3.7 million people, including 1.3 million children, out of poverty, based on pre-pandemic labor market conditions.
Even though not every U.S. worker is paid the minimum wage, everybody is affected by the minimum wage rate.
“Seventy percent of the U.S. economy is consumer spending, people buying things,” Cooper said. “If you have a huge portion of the population being paid so little that they can’t afford things, that’s a lot of customers that don’t have money to spend.”
Our expert says that keeping the minimum wage low keeps the economy from growth. Businesses would see more customers purchasing goods and services if there was more money floating around.
And the benefits of raising the minimum wage aren’t just economic, Cooper said. A higher minimum wage is associated with better public health, less smoking, increased birth rates and lower teen pregnancy rates.
So, why aren’t lawmakers raising the minimum wage?
It’s a strange situation: A majority of U.S. voters and representatives, both Democrats and Republicans, appear to favor increasing the minimum wage. According to Cooper, it’s only a subset of congressional members who are opposed, and those reps are primarily Republican.
Our expert believes that some lawmakers oppose raising the minimum wage because they’re driven by business interests, as many businesses feel they are able to make a higher profit if they keep their wages as low as possible.
But Cooper says that this is not necessarily a good strategy: Low wages are associated with low morale, low dedication, high turnover and lower sales. According to Cooper, businesses may even do better if they raise the minimum wage, even if they lose money at first, as having more money circulating in the economy would drive more business for them.
“They only see the bottom line and see the numbers, and they don’t want to adjust those margins,” Cooper said.
Though the federal government wasn’t able to successfully raise the minimum wage to $15, states can still raise their minimum wages. But that is less likely to happen in Republican-controlled states, Cooper said.
I should note that if the minimum wage is raised too high too quickly, businesses could struggle to afford their current staff and may have to let people go, which is not ideal. Cooper said it is important to set a rate that gives businesses time to adjust.
And while a $15 minimum wage is still not considered a living wage in many places in the U.S., it is considered a palatable number for businesses, and would certainly be an improvement from $7.25.
The latest proposed budget for Michigan, announced on Feb. 9, does include funds that would increase pay for certain workers in the state, specifically frontline workers.
But what about everybody else?
I unfortunately must leave you with an unsatisfying: we’ll have to wait and see.