Why America May Already Have Its Highest Minimum Wage

The federal minimum wage rose to $7.25 an hour 10 years ago. It hasn’t budged since.

For Americans living in the 21 states where the federal minimum wage is binding, inflation means that the minimum wage has lost 16 percent of its purchasing power.

But elsewhere, many workers and employers are experiencing a minimum wage well above 2009 levels. That’s because state capitals and, to an unprecedented degree, city halls have become far more active in setting their own minimum wages.

Twenty-nine states and the District of Columbia have state-level minimum hourly wages higher than the federal one. In Washington State and Massachusetts, for example, it’s $12.

But the true sea change is in the surge of city and county governments setting minimums. New York City has a $15 minimum wage, while in SeaTac, Wash., it’s $16.09.

Averaging across all of these federal, state and local minimum wage laws, the effective minimum wage in the United States — the average minimum wage binding each hour of minimum wage work — will be $11.80 an hour in 2019. Adjusted for inflation, this is probably the highest minimum wage in American history.

Growth in the Effective Minimum Has Taken Off in Recent Years

The effective minimum wage has not only outpaced inflation in recent years, but it has also grown faster than typical wages. We can see this from the Kaitz index, which compares the minimum wage with median overall wages.

To put the growth in perspective: It took the 19 years ending in 2013 for the Kaitz index to rise four percentage points. In the six years since 2013, it has risen 13 percentage points.

The Federal Minimum Affects Only a Small Share of Minimum Wage Workers

Minimum wage laws above the federal level used to be the exception. In 1998, there were about a million minimum-wage workers in states with a minimum higher than the federal level, and virtually none in localities with separate minimums. Two-thirds of minimum wage workers lived in areas where the federal minimum applied.

But today 89 percent of the nation’s 6.8 million minimum-wage employees face a minimum that is higher than $7.25 an hour. Even five years ago, relatively few such workers lived in areas with separate local minimum wages.

One consequence is increasing regional variation. American minimum wages now range from New York State’s effective $13.73, which is 62 percent of the state’s median overall wage, down to New Hampshire’s $7.25 federal peg, which is just 30 percent of the state median.

Higher Minimum Wages Have Boosted Wage Growth at the Bottom …

The most important question, though, is how the extraordinary rise in the effective minimum wage has affected American workers.

First, the good news: The average wage in the bottom third of the wage distribution — minimum-wage workers and others — has risen an average of 2.3 percent annually over the last three years after adjusting for inflation. The growth pressure from the wages of workers at or just around the minimum wage can account for between a quarter to a third of this growth.

Clearly state and local minimum-wage increases make a difference for workers who live and can find jobs in the places affected by them, even if this is not a complete explanation for the recent wage growth at the bottom nationally.

… But Like All Public Policies, Minimum Wage Increases Have Trade-Offs

Traditional textbook economics tells us that employers will cut jobs or hours for low-wage work if they’re required to set the price of labor above the level consistent with market supply and demand. Therein lies one of the most contentious debates in economics right now.

In the real world, it’s difficult to test this because of so many confounding factors.

For example, teenage employment rose about as much between 2013 and 2018 in states whose effective minimum wage didn’t change as it did in states where it rose an average of 4 percent or greater each year.

The places that chose to raise their minimum wages may be different in important respects, both socioeconomic and demographic, from those that did not, like education; industry and occupation; and labor market health.

A sizable body of empirical research that adjusts for these issues concludes that while some workers are winners from minimum wage increases, many others lose out, particularly vulnerable workers like the young and those with less education. This calls into question whether raising the minimum wage is really the best way to help workers.

But beginning with David Card and Alan Krueger’s landmark 1994 study of New Jersey’s minimum wage increase, a growing economics literature is reaching a different conclusion: that the jobs effects found in these other studies is overstated, and that the rising minimum wages in the United States have had more of a net benefit.

For example, a huge study released this month analyzed 138 different state-level minimum wage increases since 1979. The authors found largely no net negative employment effects, though they did find some in sectors exposed to international trade. And University of Washington economists revised an initial study of Seattle’s recent minimum wage increase that had showed significant negative effects on earnings for some workers. The new study found that the downsides were more muted.

Economists have several ideas for why negative jobs effects might be lower than expected. Employers may be less sensitive to minimum-wage increases because of long-term declines in national business competition and labor bargaining power, and the rise in profit rates and monopsony.

The tightness of today’s labor market may also help explain why it’s hard to see much effect from recent increases. Perhaps minimum wages really “bite” only when they exceed a certain level. Or maybe employers have been reacting to them in ways not easily captured by wage data, such as by cutting benefits.

The push for higher state and local minimum wages shows no sign of abating, so no doubt we’ll learn even more in coming years about their trade-offs, or lack thereof.

Methodology: The effective minimum wage is the binding federal, state or local minimum wage weighted by the usual labor hours of minimum wage workers at nonfarm wage and salary jobs paid hourly. It includes all federal and state laws as well as 32 localities with separate ordinances whose geography we can identify in the Current Population Survey Outgoing Rotation Group. We exclude tipped occupations from this calculation using the definitions used by the Economic Policy Institute. We calculate median overall wages and average hourly earnings in the C.P.S. to be conceptually similar to average hourly earnings in the Current Employment Statistics survey. Inflation-adjusted series use the chained C.P.I.-U deflator, which is extended before 2000 using the deflator for personal consumption expenditures. This analysis uses data on local minimum wage ordinances from the U.C. Berkeley Center for Labor Research and Education as well as from Kavya Vaghul and Ben Zipperer.

Ernie Tedeschi is an economist and head of fiscal analysis at Evercore ISI. He worked previously at the U.S. Treasury Department. The analysis here is solely his own. You can follow him on Twitter at @ernietedeschi.

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