The Real Minimum Wage : The Indicator from Planet Money Many states and cities have their own minimum wages, which are higher than the federal minimum of $7.25 per hour. One economist calculated a single measure that accounts for all those differences.
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The Real Minimum Wage

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The Real Minimum Wage

The Real Minimum Wage

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STACEY VANEK SMITH, HOST:

The federal minimum wage is $7.25 an hour. So for someone who works full time, that is about $15,000 dollars a year. But economist Ernie Tedeschi says that is not the only minimum wage that matters.

ERNIE TEDESCHI: It's - you can almost think of it as like a minimum of minimum wages.

CARDIFF GARCIA, HOST:

Yeah, a minimum of minimum wages. The federal minimum wage is the absolute floor. But state governments and city governments, they can require a higher minimum wage than the federal one.

VANEK SMITH: And a lot of states and cities have recently done exactly that. They've raised their minimum wages to levels that are higher, sometimes a lot higher than the federal minimum wage. So when we talk about how much the minimum wage has changed throughout the years, the federal minimum wage is only a starting point.

GARCIA: Yeah because what we really want to know is how wages have changed for workers who do minimum wage jobs. But minimum wage workers get paid differently depending on where in the country they are doing that work. So what would be nice to have is a measure of the minimum wage that takes into account all those different minimum wages. We really did just say minimum wage a lot right there.

VANEK SMITH: It's so true - maximum minimum wages right there.

GARCIA: Exactly. I'm Cardiff Garcia.

VANEK SMITH: And I'm Stacey Vanek Smith. And, Cardiff, ask and ye shall receive. Today on THE INDICATOR FROM PLANET MONEY, Ernie Tedeschi explains how he came up with exactly the measure you were talking about. He calculated an alternative measure of the minimum wage. He also tells us how this alternative minimum wage has changed in recent years and how much it affected workers in different parts of the country.

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VANEK SMITH: Economists have an ongoing debate about the effects of raising the minimum wage on businesses and on workers. Some economists argue that raising the minimum wage leads companies to hire fewer workers because if those companies had to pay workers higher wages, you know, they will not hire as many people.

GARCIA: And some economists also say that when businesses have to pay a higher minimum wage, those businesses will also just raise the prices of whatever they sell to offset the cost. So the cashier at a fast food restaurant might earn more money, but you'll have to pay more for a burger.

And then finally, in other cases, some companies might just agree to pay the higher wages and keep a little bit less in profits without bothering to offset the cost because they just need those minimum wage workers to stay with their companies. These debates won't be settled for a while, but what has happened in the last decade especially will at least give economists more data to work with.

VANEK SMITH: The last time the federal minimum wage was raised was back in the summer of 2009, almost 10 years ago. And it has been $7.25 ever since. But, of course, in the last 10 years, the prices of goods and services in the economy have gone up just because of, you know, normal inflation. So that same $7.25 does not buy as much as it did 10 years ago.

GARCIA: Yeah. Another way of saying that, the way an economist would say it is that the purchasing power of the minimum wage has gone down.

VANEK SMITH: I like that. It's nice to have the economist, like - yeah.

GARCIA: The economist lingo, yeah. And economists...

VANEK SMITH: You can't buy as much stuff.

GARCIA: Yeah. And economist Ernie Tedeschi, who uses such lingo, knows roughly by how much that purchasing power has gone down.

TEDESCHI: The purchasing power of the minimum wage has declined by 16% in total since it was last raise in July of 2009.

VANEK SMITH: But Ernie says that federal minimum wage only applies in less than half of all states. These are states that do not have their own higher minimum wages. So businesses inside those states just have to pay their workers the 7.25.

TEDESCHI: I think the latest count is that there are 21 states who don't have their own minimum wages or explicitly target the federal minimum wage. And so in that case - in those cases, the $7.25 per hour would apply.

GARCIA: And that leaves a whole bunch of other states that do have higher minimum wages than the federal one. And that, of course, leaves 29 states that have higher minimum wages than the federal minimum wage plus Washington, D.C. And so the result is that if you look across the entire country, almost 9 out of 10 workers who have minimum wage jobs are actually making more than the federal minimum wage.

VANEK SMITH: And Ernie says it is not unusual for a state to have a minimum wage that is higher than the federal government's. But until roughly the 2000s, those states were only raising their own minimum wages by enough to keep up with inflation, usually not by much more. But something started to change about a decade ago.

TEDESCHI: But then when we get to 2010, and particularly the last five years, there's been a change. The state - state governments and local governments have been issuing their own minimum wage ordinances or updating their existing minimum wage ordinances. And they haven't just been treading water against inflation. They've been proactively raising the minimum wage against inflation.

GARCIA: In other words, the minimum wages in these states have been going up fast enough that workers who make that minimum wage can afford more and more stuff.

VANEK SMITH: Higher purchasing power.

GARCIA: Yeah, exactly.

VANEK SMITH: And in addition to states raising their minimum wages, the other big trend of the last 10 years has been what city governments have done to their minimum wages.

TEDESCHI: What's been historically extraordinary about the last five or 10 years has been the emergence of local minimum wage ordinances. Like, it's not just, you know, California or New York state raising their minimum wages. It's been localities like Seattle, Wash., you know, San Francisco, Calif., New York City - individual counties issuing their own separate minimum wages.

GARCIA: And so with all of these different minimum wages in different places throughout the country, it is hard to say how much things have changed as a whole for the country's minimum wage workers. Ernie wanted to calculate a number that somehow captured these regional differences and then averaged them, a number that would give a sense of what the minimum wage throughout the country effectively was - so he did.

TEDESCHI: The bottom line of the calculation was what I called the effective minimum wage in America in 2019 is $11.80 an hour.

VANEK SMITH: Eleven dollars and 80 cents an hour. That is today's PLANET MONEY INDICATOR. That is the effective minimum wage in the United States as calculated by Ernie Tedeschi.

TEDESCHI: So I just looked at every worker in America who is bound by some minimum wage, whether they're bound by the federal minimum wage - that is they live in 1 of those 21 states that we talked about - whether they're bound by a state or local minimum wage.

GARCIA: Then Ernie added up all the hours worked by these minimum wage workers. And he applied the relevant minimum wage depending on where those workers lived. And then finally, he just took the average pay of all the hours worked. That average was $11.80 an hour.

VANEK SMITH: Now, the data that Ernie needed to make that calculation only goes back to 1994. But in the time since then, this effective minimum wage is the highest it's ever been.

GARCIA: In fact, Ernie says, in the last 10 years, the effective minimum wage has not just gone up faster than inflation. It has also more than kept up with the wages of U.S. workers overall - in other words, of workers who make more than the minimum wage.

TEDESCHI: So I think the bottom line is that is whether you're adjusting by just inflation or whether your question is, you know, how does the minimum wage stack up with what, you know, a typical person otherwise is making, the level of the minimum wage is much, much higher than it was in the past.

GARCIA: Ernie says there are some caveats that come with this new measure, as there are caveats with pretty much any economic measure. For example, the minimum wage in New York City is $15 an hour, whereas Virginia is one of those states that just goes by the federal minimum wage of 7.25. But everything costs more in New York City.

So it is not necessarily the case that a minimum wage worker in New York City is better off than one in Virginia. It is still important to understand the different circumstances faced by minimum wage workers in different parts of the country when evaluating its potential effects.

VANEK SMITH: And meanwhile, all of the changes of the past decade made by states and cities have given economists like Ernie a lot more data to study. So you can expect the big debates about the effects of minimum wage and whether or not it should be raised to continue.

GARCIA: And you'll probably hear about it on THE INDICATOR.

VANEK SMITH: You'll probably hear about it on THE INDICATOR.

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GARCIA: Hey, everyone. Before you leave, a quick note that THE INDICATOR is in Los Angeles this week. And we would love to meet some of our listeners here. So tomorrow, Friday, May 17, from 5:15 p.m. and into the night, we're going to be at Rick's, which is the bar next to the pool at the Hotel Figueroa. The address is 939 South Figueroa Blvd (ph). Again, that is Rick's at 5:15 p.m. Come on by, say hello, have a drink with us.

VANEK SMITH: THE INDICATOR is produced by Constanza Gallardo and Darius Rafieyan and is edited by Paddy Hirsch. And we're produced by NPR.

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