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MainStreet Macro: Minimum wages are rising. But is it enough?

January 17, 2023 | read time icon 5 min

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Last week, data for December showed that the rate of inflation had fallen to 6.5 percent from 7.1 percent a year earlier. The decline was driven mainly by a steep drop in gas prices.

While overall inflation might (thankfully) be losing steam, workers, especially those with smaller paychecks, continue to suffer an erosion of the pay gains they reaped during 2022’s tight labor market.

And at a time when it feels like the cost of everything has gone up, one number has remained immutable for more than a decade – the federal minimum wage.

The disconnect between fast-moving inflation and the stagnant federal minimum wage prompted a record number of states and localities to raise the bar on their own minimum wages this year. By the end of 2023, the minimum wage will have risen in 27 states and 59 cities and counties. Of those 86 jurisdictions, 57 will have a $15 minimum wage or more for some or all workers, according to data compiled by the National Employment Law Project.

In short, the $7.25-an-hour federal minimum wage is no longer the benchmark it once was. Today I’ll talk about minimum wages and why we need to reframe our conversation to talk about living wages instead.

Very few people earn the federal minimum wage

In 2022, only 3.7 percent of the more than 25 million workers on ADP client payrolls made $7.25 an hour or less. That’s partly because most states require that companies pay employees more than the federal threshold.

Today, 30 states and Washington, D.C., require workers be paid above the federal minimum. And some cities and jurisdictions have raised the floor on wages even higher. The city of SeaTac, Washington, – home to the Seattle-Tacoma International Airport, has a minimum of $19.06 per hour, the highest in the U.S. And Washington claims the top slot for states, at $15.74 per hour.

State and local governments aren’t alone in raising the bar on pay. Companies, especially large national retailers, also have established minimum thresholds on hourly rates that often are well above federal and local area minimums.

The real federal minimum wage has actually fallen

The fact that the federal minimum hasn’t budged since 2009 raises an important question – how does this wage keep up with inflation?

Short answer – it doesn’t.

In 1980, the federal minimum was $3.10 an hour. If you were to adjust that rate for inflation over the last 42 years using this handy inflation-adjustment calculator, the federal minimum today would be $11.83, more than 60 percent higher than it is now.

The living wage gap

When we economists talk about wages, we also talk about another concept – the living wage. That’s the level of income necessary to cover the basic necessities of housing, food, health care, and education.

One important component of a living wage is that households spend no more than 30 percent of their gross income on rent or mortgage payments. Because rents and house prices vary so much from place to place, the living wage does as well.

Research from the Massachusetts Institute of Technology suggests that the national living wage for a family of two adults and two children is $24.16 per hour for each adult. Those same adults would need to work more than two full-time, federal minimum-wage jobs to earn a living wage.

My take

This week I’m attending the World Economic Forum in Davos, Switzerland, where I’m moderating a panel on living wages. 

The WEF, a non-profit that regularly convenes leaders from the private and public sectors, this month issued its annual Global Risks Report, which found that the biggest challenge confronting the global economy over the next two years will be a cost-of-living crisis in the aftermath of the pandemic.

In short, the gap between mandated minimum pay and living wages has become a global front-burning issue.

In the U.S., one of the biggest drivers of inflation is housing costs. Last year, more than half of households making less than $30,000 a year paid more than half of their income in rent, according to Harvard’s Joint Center for Housing Studies. You can do the math: A two-income household where both workers earn the federal minimum wage barely clears $30,000 a year before taxes. Even though inflation is easing up, the cost of basic necessities such as housing continue to rise. And the gap between minimum wages and the living wage continues to widen along with it.