By Kate Daniel

President Obama’s State of the Union address included the expected highlights of immigration reform, gun control, climate change, the deficit, and Afghanistan. Perhaps more unexpectedly, he also called on Congress to raise the national minimum wage to $9.00 an hour, and to tie future increases to the cost of living. Just how big a change is that, and will it achieve the President’s stated intent of ensuring a livable wage for workers?

First, the change to $9.00 from the current national minimum wage of $7.25 is a significant increase. The increased wage would be higher than the current minimum wage in all states except from Washington (which currently stands at $9.19). A few other states come close at $8.00 or higher (California, Oregon, Nevada, Illinois, Washington DC, Massachusetts and Vermont); however, the majority of states go by the national minimum of $7.25. See a map from the BLS here. Additionally, the real minimum wage (adjusted for inflation), has decreased since the late 1960s:

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In comparison to other countries, our minimum wage is in the mid-range of OECD nations with available minimum wage data (time series data available here). Compared to European nations with a minimum wage, and adjusted for the purchasing power of the currency and the price of goods in the nation, the U.S. falls not quite in the top third:

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Note this selection of countries does not include Germany or Scandinavian countries, which don’t have statutory minimum wages because collective bargaining is so strong. These countries tend to have much higher wages.

How would $9.00 compare to the “cost of living”? Well, that depends on where you are and how you define livability standards. Researchers at MIT have developed a Living Wage Calculator that accounts for varying costs across states and regions, and back calculates the wage needed for a full-time worker to achieve poverty level and livable wages.  The estimates range from $7.86 in Arkansas to $12.51 in Hawaii for a single adult. Cost of living varies enormously by region, and its difficult to say whether a national minimum wage should meet an average cost of living across the country, or ensure a livable wage to any American worker in any part of the country. Another consideration is how the minimum wage should be updated to rise with the cost of living: would a chained CPI adjustment be more palatable from the beginning of such an annual adjustment program than it has proven as a Social Security fix?

The question of whether raising the minimum wage will increase unemployment has been highly debated elsewhere, and we won’t get into that debate here and now. All this, however, may be ignoring another elephant in the room: is an increase in the minimum wage an effective way of providing assistance to the working poor? Dylan Matthews points to evidence that we can get more “bang for our buck” through the Earned Income Tax Credit, for example. However, Matt Yglesias reminds us that the EITC will show up in the federal budget and minimum wage increases will not, making it much more politically palatable in current fiscal times.

 

Kate Daniel is a first-year masters student at the Goldman School of Public Policy.