The recent campaigns to push for an increase in minimum wage rates across the United States have attracted much media coverage. The state of New York is making moves to approve a $15 per hour floor, joining Seattle, San Francisco and Los Angeles. There is growing support for ensuring minimal income levels to promote equitable living standards. Less attention has been paid, however, to the capricious relationship minimum wage policy has with inflation. The U.S. is unique among developed nations in maintaining an inadequately low federal poverty rate and failing to accommodate increases in the cost of living.
The federal minimum wage rate has historically been intended to provide the minimal salary working Americans need to earn a meaningful living. Though the minimum wage has been increasing consistently since its enactment in 1938, at 25 cents per hour, its value in any given year has to be understood in terms of real dollars. Factoring in the Consumer Price Index, the jump in the minimum wage from $5.15 in 2006 to $7.25 in 2009, for instance, was minimally significant in terms of providing financial relief.
The real purchasing power of a minimum wage fluctuates greatly, peaking and dropping at intervals. Moreover, each increase in the minimum wage is reactive, providing some relief to low-skill workers, but then dropping in subsequent years, until federal action is required yet again. In other words, with each passing year, wages remain stagnant while the purchasing power of the dollar becomes progressively weaker.
If working people cannot sustain themselves with wages alone, they will have to rely on government entitlements and safety net programs to supplement their resources. Such services are typically means-tested, which means that eligibility is reserved only for those who lack sufficient income. Such requirements are often defined by a poverty threshold, which is known as the Federal Poverty Level (FPL). In the U.S., the original measurement for the poverty threshold was computed as the cost of a minimally substantive meal for a family of four, multiplied by three.
Why is this important? For starters, there is a gap between FPL thresholds and the minimum wage floor. For example, earning 100 percent of the federal poverty threshold would mean that a single individual would be earning $11,770, while a full-time worker working 52 weeks of the year would earn $15,080. In essence, the measurement of poverty would suggest that the annual salary at minimum wage is less than $4,000 higher than what the federal government considers to be “in poverty.” For context, the average monthly rent for a home in Minneapolis, hardly an expensive city, is $1,259 per month.
The metric establishing the federal poverty threshold is peculiar. There was no federal standard for measuring poverty in the U.S. prior to the early 1960s. The Department of Agriculture used to perform much of the policy research on food scarcity and ran some food assistance programs, and its standard eventually became the basis for the poverty threshold during the Great Society era. However, the cost of food is arguably no longer the most substantial portion of any family’s budget costs, so using it as a premise for calculating household expenses makes little sense.
The U.S. approach to poverty stands alone in the developed world. Other nations in the Organisation for Economic Co-operation and Development (OECD), by comparison, measure poverty as being half of the national median income. By this measure, the U.S. has the third highest rate of poverty in the OECD, outperforming only Israel and Mexico.
In 2014, the annual U.S. median income was $53,657, which would mean that FPL for an individual should be $27,897 in accordance with OECD guidelines. But the U.S. measurement of poverty is only 44 percent of the OECD measurement, and the current federal minimum wage of $7.25 an hour is about 56 percent of the OECD poverty level. Increasing the minimum wage to $13 an hour would be enough to push the U.S. past this threshold, while $15 an hour would be 116 percent of the OECD poverty threshold. While this would be meaningful in terms of bringing people out of poverty, it would still fall far short of the median income.
The minimum wage is intended to provide every working person with a means of providing a meaningful life in exchange for full-time work, and to safeguard working Americans from poverty. From a public policy perspective, if the government wants to ensure that budgets for social entitlements and public safety nets do not balloon due to demand, then it is important to promote economic incentives that compel people to work. Considering how $7.25 is only a few dollars away from the poverty line, the current level of encouragement is insufficient. In order to achieve real economic relief, Americans need to get serious about what it takes to afford a minimal standard of living, rather than continuing with a policy that keeps so many people living on the edge of poverty.