Minimum Wage Hikes Part III: Minimum Wages and Federal Assistance

Continuing the thoughts from the post I had on Valentine’s Day, I wanted to address a few of the questions I received surrounding the proposed hike to the federal minimum wage. During his State of the Union speech, President Obama stated that a full-time worker earning the current federal minimum wage of $7.25 per hour would fall below the poverty line. So the question popped up, what’s the relationship between low-wage workers and those who require government assistance?

Well, I was able to track down some research through the Office of The Assistant Secretary for Planning and Evaluation (that’s in the U.S. Department of Health & Human Services), and it paints an interesting picture.

The first thing to realize is that not everyone earning around the minimum wage is in dire economic straits. One brief from the ASPE categorizes “low-wage workers” as those making less than $10.50/hour in 2008 and less than $8.63/hour in 2001. They found that less than half (44%) of low-wage workers lived in low-income families, and only 26% lived in low income families with children. The majority of low-wage workers live in families that don’t require government assistance.  A more detailed paper from ASPE found that – at least as of January 2001 –4.8% of low-wage workers received TANF (Temporary Assistance for Needy Families) payments. Similarly, 15.2% of low-wage workers are on food stamps, and 17% have child-care assistance. The biggest area of government assistance is the earned-income tax credit, a refundable tax credit for low- and middle-income earners. In 2001, 58.6% of all low-wage earners were eligible for the EITC. Interestingly, some opponents of increasing the federal minimum wage have jumped on board with the idea of increasing the EITC instead.

So, the data seem to show that it is only a minority of those who earn around the minimum wage that require federal assistance. That said, relative to overall population, low-wage workers are more likely to be on public assistance.  And once you look at at-risk populations like low-wage unmarried mothers, public assistance increases markedly – food stamp usage is 32% for this group compared 15.2% for all low wage workers.   In addition, working families make up a large share of the families relying on public assistance.  For example, 53.1% of California families on public assistance are working.   So, changes in the minimum wage and changes in wages at the bottom could have implications on public assistance enrollment.

  • Ben Miller-Coleman

    Hi Robin,
    Thanks for the series. I think this is an important issue you are tackling. I can’t remember if you did this in your first article or not, but I was wondering comparatively speaking, has minimum wage kept paced when inflation is factored in? Is there a way to compare minimum wage in 1928 when it was created and minimum wage today?

    Thanks,
    Ben

    • Robin Anderson, Economist, Principal Global Investors

      Hi Ben, thanks for reading. There

        has

      been some work done to look at inflation-adjusted minimum wage. Here’s a link to some work at Oregon State University. What you’ll see is that when you adjust the minimum wage to 2012 dollars, the 1938 minimum wage comes out at around $4 per hour. Compare that to the current $7.25 per hour. Inflation-adjusted minimum wages peaked around 1968 – OSU tags the figure at around $10.51 in 2012 dollars. As you’ll see in the graph, that’s been on a downward trend since then though. The slips you see between 1968 and today are the periods when Congress doesn’t adjust the minimum wage for inflation; the jumps are when Congress bumps the minimum wage. So a pattern emerges where the minimum wage is increased, and for a period of five to ten years, inflation eats away at it. Bump again, and inflation starts eating away again.

  • Ben Miller-Coleman

    *1938, sorry for the typo.

  • Ben Miller-Coleman

    Last question, then I will stop pestering you on this topic. Historically, how does the comparison between minimum wage and executive compensation play out (I believe, but am unsure, that executive compensation is a term of art in economics that can be quantified)? What was the ratio in 1938 and what is it now?

    • Robin Anderson, Economist, Principal Global Investors

      While not specifically targeted at “executives,” this interactive chart from EPI shows the relative changes in average income over time. If you use “top 1%” as a proxy for executives and “bottom 90%” as a proxy for lower-wage workers, you can see how the distribution has changed from the early parts of the last century until 2007.

  • Ben Miller-Coleman

    Is there any reason to believe that the upward slope to the 1% won’t continue?

  • Jason

    I personally don’t believe there is an issue with the minimum wage, the issue is with the money the wage is being paid in.

    In 1964 the minimum wage was $1.25 but those 5 quarters were made of 90% silver. Those same 5 quarters have a present day melt value of just over $26 (based only on today’s silver spot price of 28.93, excluding the copper content).

    =5*(28.93*0.0321507466*6.25*0.9) = $26.16