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WebMemo #19 on Jobs and Jobs and Labor Policy

June 28, 2001

Who is Paid the Minimum Wage and Who Would be Affected by a $1.50 per Hour Increase

By

Who Works the Minimum Wage?

The 1.6 million paid-hourly workers who earn minimum wages can be broken down into two broad groups.1

  • Over half (53 percent) are teenagers or young adults under the age of 23. More than half (54 percent) of these young workers live in families with incomes two or more times the official poverty level for their family size and 18 percent live in poor families. The average family income of these young workers is almost $50,500 per year. The average income for single young workers is $11,200. Over 63 percent are enrolled in either high school or college.

  • The other half (47 percent) are workers ages 23 and up. More of these workers live in poor families (29 percent). Yet, even within this half of the minimum wage population, the average family income is over $38,100 per year. The average income for single workers is $19,300. Over 30 percent of these older workers did not graduate from high school and another 36 percent had only a high school diploma.

  • Almost 43 percent of all minimum wage workers are children, 26 percent are married family heads or spouses, 11 percent are single family heads, and 17 percent are single people (another 3 percent are other relatives).

  • Less than 21 percent of minimum wage workers are the sole breadwinners of their families and less than 5 percent are sole breadwinners that work full-time year-round. Less than 5 percent of minimum wage workers are poor single mothers over 18 years old.

  • Over 57 percent of all minimum wage workers work part-time voluntarily. Only 25 percent work full-time year-round while over 28 percent work part-time part of the year.

  • The average family income for all minimum wage workers is $45,200 and their wages account for 35 percent of their total family income. The average income of single-nonfamily minimum wage workers is $16,800.

Very Few Workers Remain at Entry-Level Wages for Long

Nearly two-thirds of minimum wage workers move above the minimum wage within one year, and the median raise for those workers is over 10 percent.2 For full-time minimum wage workers, the median first-year raise is almost 14 percent. Entry-level jobs are not lifelong dead-end jobs. These jobs allow Americans to establish a track record of work that creates opportunities for better paying jobs.

Who would be affected by a $1.50 Increase in the Minimum Wage

There are 7.1 million paid-hourly workers who would be affected by an increase in the minimum wage to $6.65 per hour _ 1.6 million are currently paid minimum wages and 5.5 million are paid between $5.15 and $6.65 per hour.3 These workers can also be broken down into two broad groups.

  • One half (50 percent) are teenagers or young adults under the age of 23. Two-thirds (66 percent) of these young workers live in families with incomes two or more times the official poverty level for their family size. Just 14 percent live in poor families. Almost 74 percent are enrolled in either high school or college. Just 5 percent are married. Over 88 percent live in families with an average income of almost $63,600 per year. The average income for single young workers is $10,000, but their average household income is $47,100 because 81 percent live with two or more people.

  • The other half are workers ages 23 and up. Over half (51 percent) of these older workers live in families with incomes two or more times the official poverty level for their family size and 22 percent live in poor families. Over half (56 percent) do not have any children of their own to support. The average family income of these older workers is almost $38,300 per year. The average income for single workers is $18,000. Over 27 percent of these older workers did not graduate from high school and another 40 percent had only a high school diploma.

  • Over 42 percent of the workers who would be affected by an increase in the minimum wage are children, 26 percent are married family heads or spouses, 12 percent are single family heads, and 16 percent are single people (another 4 percent are other relatives).

  • Less than 17 percent are the sole breadwinners of their families and less than 7 percent are sole breadwinners that work full-time year-round. Less than 6 percent are poor single mothers over 18 years old.

  • Almost 54 percent of all workers who would be affected by an increase in the minimum wage work part-time voluntarily. Only 31 percent work full-time year-round while over 26 percent work just part-time part of the year. Almost 6 percent are union members.

  • The average household income of all paid-hourly workers affected by the minimum wage increase is $51,200 and their wages account for just 29 percent of their total household income.

  • Almost half (48 percent) live in the South and 27 percent live in the Midwest.

Increasing the Minimum Wage Would Not Help the Poor

  • Just 1.9 percent, or 404,000, of the 20.8 million poor Americans over the age of 15 would be affected by an increase in the minimum wage to $6.65 per hour.

  • Studies show that raising the minimum wage does not significantly reduce poverty. In fact, for some subgroups, minimum wage increases appeared to raise the level of poverty.4

Unprecedented Increase

Senator Edward M. Kennedy (D-MA) is proposing an unparalleled increase in the minimum wage. His bill (S. 964) would increase the hourly minimum wage by $1.50 over the next 18 months to $5.74 thirty days after enactment; $6.25 on January 1, 2002; and $6.65 on January 1, 2003. It would amount to a 29.1 percent increase in the minimum wage-over five times the rate of Inflation that is forecast by the Congressional Budget Office over the next two years. Never before has Congress raised the minimum wage by more than $.90 per hour over a two-year period.

Large Unfunded Mandate on State and Local Governments

The Congressional Budget Office estimates that increasing the minimum wage to $6.65 would impose a $2.1 billion unfunded mandate on state and local governments from fiscal year (FY) 2002 to FY 2006. This exceeds the statutory threshold in the Unfunded Mandates Reform Act and may require a point-of-order vote in Congress to waive the Act. Much of the higher cost for local governments will be borne by taxpayers in small towns and rural communities.

The Congressional Budget Office also estimates that increasing the minimum wage to $6.65 would impose an additional $1.5 billion cost to federal taxpayers in the form of in higher federal spending for welfare-to-work programs from FY 2002 to FY 2006.

Large Private Sector Cost

The Congressional Budget Office estimates that increasing the minimum wage to $6.65 would cost private sector employers $30.2 billion from FY 2002 to FY 2006. Someone would have to pay for this cost. Economic research indicates that those who pay the most are unskilled youth through fewer job opportunities and consumers through higher prices.

The last time the minimum wage was increased, restaurant menu prices increased 2.6 percent in 1997 compared with a 1.7 percent increase in the consumer price index. Inflation in the service sector, in which most minimum wage workers are employed, rose 2.8 percent in 1997-1.1 percent higher than the overall Inflation rate.

Reduces Job Opportunities for Unskilled Americans

Proponents often point to the increase in employment after the 1996_97 hikes in the minimum wage as proof that mandating an increase does not destroy jobs. This argument, however, is misleading and deceptive. Focusing only on total employment hides significant negative effects for groups like teenagers (see chart). Although the last increase in the minimum wage did not reduce total employment, it did reduce employment rates, particularly for unskilled teenagers. Only the red-hot economy in 1998 and 1999 was able to mitigate the impact of the last minimum wage increase on teenagers.

  • A 1999 survey of small businesses by the Jerome Levy Economics Institute shows that raising the minimum wage to $6.00 per hour would cause more than 20 percent of small-business owners to reconsider their employment decisions.

  • The Congressional Budget Office estimates the potential job losses associated with an increase in the minimum wage to $6.65 at roughly 200,000 to 600,000 jobs.

In addition to reducing the size of their workforce or not hiring as many additional workers, employers could also reduce the number of hours worked by some of their employees. Because many minimum wage workers are on part-time schedules, reducing hours may be easier to do than if all workers were employed on fixed eight-hour schedules.

Employers may also respond to an increase in the minimum wage in ways that do not involve adjusting employment levels or hours. For example, some employers might reduce fringe benefits or may not add new benefits to attract and retain workers.

Would Make welfare Reform More Difficult for States

The states face an enormous challenge of moving families from welfare to work-particularly as federal work requirements increase and the welfare caseload shrinks to Americans with the least job-related skills and greatest barriers to work. To move forward with welfare reform, state officials should have the flexibility to determine the appropriate entry-level wage rate for their states without a burdensome federal mandate that restricts their ability to help the poor.

· Higher mandated wages reduce employment opportunities for the least skilled and cause shifts in the profile of those who get hired as employers favor more highly skilled applicants. And as entry-level unskilled job opportunities disappear, welfare recipients have a more difficult time finding work.

Economic uncertainty Suggests Caution

Economic growth has slowed dramatically. Consumer spending is sluggish and investment spending has collapsed. Employment growth is weak and unemployment has increased. Inflation is up, energy prices remain relatively high, and profit margins are being squeezed. Now is not the time to rapidly increase the minimum wage.

D. Mark Wilson is a Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies, at The Heritage Foundation.

Show references in this report

Endnotes

1 Heritage Foundation calculations based on the March 2000 Current Population Survey conducted by the Census Bureau. This estimate includes paid-hourly workers earning the federal minimum wage and paid-hourly workers earning state minimum wages that are higher than the federal. Over 1.1 million earn the federal minimum wage and 500,000 earn higher state minimum wages.

2 William Even and David Macpherson, "Rising Above the Minimum Wage," Employment Policies Institute, January 2000.

3 Heritage Foundation calculations based on the March 2000 Current Population Survey conducted by the Census Bureau. This estimate does not include workers in states whose state minimum wage is higher than the federal minimum wage. For example, no workers in California will be affected because the state minimum wage rises to $6.75 on January 1, 2002.

4 Richard Vedder and Lowell Gallaway, "Does the Minimum Wage Reduce Poverty?" Employment Policies Institute, June 2001; Jill Jenkins, "Minimum Wages: The Poor Are Not Winners," Employment Policy Foundation, January 12, 2000; and Ronald B. Mincy, "Raising the Minimum Wage: Effects on Family Poverty," Monthly Labor Review, July 1990.

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