Tuesday, December 10, 2013

Has the minimum wage lost purchasing power over the last 30 years? Well, Yes and No. Read here why the ambivalence.

Lots of debate about how the current minimum wage of $7.25 has not kept pace inflation over the past 30 years or so and it how it has hurt the working poor with families.

This graph (the BLUE LINE) below shows the yearly income of person working 2,000 hours in a year and earning a minimum wage of $7.25.  That would be a gross total of $14,500.  Going from Right to Left on the BLUE line is that $14,500 adjusted for inflation.  Example: Go back to 1976 (the left most tip of the blue line).  Take the $18,300 annual income and divide by 2,000 hours worked.  You get a wage of $9.15. This means for a minimum wage worker TODAY to have the SAME purchasing power as a minimum wage worker in 1976 he/she would have to earn $9.15 per hour.  This is what it means when people refer to the minimum wage not keeping up with inflation.

Source: NY TIMES
Tax Policy Center
However, wages are not the only source of "income" for low wage working families.  There is a Federal tax credit available to the "working poor" call the Earned Income Tax Credit ("EITC").  Basically it a "reverse tax" and the recipient is entitled to receive this in cash.

A household that has one wage earner making just the minimum wage AND has 2 dependent children is eligible for a cash tax credit of $5,320 (source HERE).

The RED line in the graph above shows the early salary of a minimum wage worker PLUS the dollar value of the EITC in any given year since 1976.

So, in 2013  if we include the EITC as income/compensation along with the $14,500 in wage income we get a gross total of $19,872 for those 2,000 hours worked.  That is an effective hourly wage rate of $9.94.

Now look at the same graph below with the dotted line I inserted.  While the the nominal minimum wage has lost purchasing power due to inflation, the difference in the erosion has been compensated for, in large part, by the increase in EITC payments.


So, if we include the EITC as a form of compensation to the working poor we get different take on whether or not the working poor are worse off compared to yesteryear.

My take is the working poor are not better off or worse off when you look at it like this.  However, if the increasing use of tax money is used to make up the difference in lost purchasing power for the working poor, then we seriously have to look at the minimum wage and the function it serves.

This serves as ANOTHER subsidy for employers, especially the LARGE ONES who pay the minimum. Think about that.  There has to be a better way.

Whatcha' think????

Addendum:  I estimated this wage earner would be eligible for about $400.00 per month in SNAP (food assistance/Food Stamps).  On a yearly basis that would be a cash value of $4,800.00.  Using the 2,000 hours worked in a year, that would work out to $2.40 per hour we would have to add to the $9.94.

So total hourly wage with EITC and SNAP benefits would be $12.34.

In effect, taxpayers at the minimum are subsidizing minimum wage paying companies to the tune of $5.09 in order to lift people out of poverty.  Pretty sure I could come up with additional transfer payments that would increase that subsidy.

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