Most Americans understand that living on minimum wage is less than ideal, but did you know it was originally meant to be a living wage? In this blog, we’ll explore how the minimum wage came to be and how it’s evolved over time.
Five years before the first minimum wage became law, then-President Franklin Delano Roosevelt said:
By living wages, I mean more than a bare subsistence level. I mean the wages of a decent living.
1933, Statement on National Industrial Recovery Act
What is Minimum Wage?
The first U.S. minimum wage was implemented in 1938 as part of the Fair Labor Standards Act. Since then the federal minimum wage has increased numerous times often with significant push back.
Glossary of Terms
How Minimum Wage and the Poverty Line Relate
Also called the poverty threshold, the poverty line is the minimum level of income considered necessary to sustain life. It is calculated by finding the total cost of essential resources necessary for the average adult person for one year.
Within the United States, the poverty line is set at the federal level by The U.S. Department of Health and Human Services and is based on census data.
If an individual’s income falls below the poverty line, they are considered poor and should qualify for public assistance. The poverty line is one of many metrics used to determine eligibility for different types of aid, it is also used to help set the minimum wage.
Although the poverty line is set at the federal level, state and local governments set their own poverty guidelines based on the cost of living and help determine eligibility for local assistance.
In 2022, the annual income poverty line for the 48 contiguous United States and the District of Columbia is $13,590, just $330 (2.3%) below the annual income of federal minimum wage earners.
The Federal Minimum Wage
Approximately 2.9 million American workers make minimum wage and of those, 247,000 make the federal minimum. Minimum wage workers provide essential services like food prep, childcare, healthcare, retail sales, restaurant work, delivery, shipping, cleaning service and more.
The current federal minimum wage is $7.25 an hour and hasn’t increased since 2009. If you work forty hours per week at this rate you would earn approximately $1,160 a month and $13,920 a year before taxes provided you took zero vacation or sick days. That’s 61% less than the national median personal annual income of $35,805.
|Monthly and Annual Earnings on Minimum Wage|
|7.25 x 40 hours/week x 4 weeks per month = $1,160/month before taxes|
$1,160/month x 12 months = $13,920/year before taxes
Local Vs. Federal Minimum Wage
As a matter of principle, the minimum wage is designed to be higher than the federal poverty line; however, due to fluctuation in the cost of living across the country, the federal minimum wage can leave people below poverty thresholds at the state and local levels. For that reason, many states and local governments set their own minimum wages.
- Major Cities in 8 States have adopted rates higher than their state minimum.
- The highest local minimum wage in the country is $17.20 in Emeryville and Sunnyvale CA, a suburb of San Francisco.
- 20 States use the Federal minimum wage of $7.25.
- None of the states where the $7.25 federal minimum prevails have higher local minimums.
- In places where an employee is subject to both the state and federal minimum wage laws, the employee is entitled to the higher of the two wages.
Source – Pew Research Center
The Minimum Wage and Inflation
The current federal minimum wage ($7.25 an hour) has not increased since 2009 despite steady increases in inflation. This means that every year the minimum wage stays the same, workers have less spending power with what they earn.
Although the minimum wage is meant to be a living wage, it hasn’t kept up with inflation and the cost of living since the late 1960s.
- Adjusting for inflation the current federal minimum wage is worth 31% less than it was in 1960.
Proposed Increases to The Minimum Wage
For more than a decade people across the country have advocated for legislation to raise the federal minimum wage. So far, efforts at the federal level have failed, while numerous states and large cities have passed legislation increasing local minimums. The “Fight for $15” movement began ten years ago in 2012, with recent wins in eleven states.
The Raise the Wage Act of 2021 proposes increasing the minimum wage to $15 over the next 5 years. Many worry that this increase is too little too late. By the time many areas would see this increase, the efficacy of the $15 minimum will be weakened by inflation.
- Eleven states and The District of Columbia passed legislation to eventually reach a $15 minimum wage between 2022 and 2026.
- The current average minimum wage across the U.S. is $9.95
Budgeting on Minimum Wage
Creating a minimum wage budget using the 50/30/20 rules exposes obvious flaws in the federal minimum wage and those who make higher local minimums don’t fare much better.
We compared the current federal minimum wage, the average federal, state and local minimum as well as a $15.00 federal minimum proposed by the Raise The Wage Act to see how they would fare in a 50/30/20 budget.
|Category||Hourly Wage||Monthly Income||Must Haves 50%||Wants 30%||Needs 20%|
|Raise the Wage Act||$15.00||$2,400||$1,200||$720||$480|
The immediate red flag raised by the numbers above is the cost of housing. The “Must haves” category in a 50/30/20 budget should cover housing and all essential bills but in most cases wouldn’t be enough to cover housing. Further, experts recommend spending around 30% of your monthly income on housing.
Budgeting for Housing on Minimum Wage
|Category||Hourly Wage||30% Housing Budget||U.S Average Monthly Rent||Difference|
Is The Minimum Wage Livable?
Increases in housing costs, in particular, make it difficult to follow traditional budgeting practices while living on minimum wages.
Though not impossible, living on the minimum is extremely difficult. Those who earn low wages must often subsidize living costs and rely on the income of others to get by. Many minimum wage earners turn to public assistance to make ends meet or end up taking on debt.
If the 2021 Raise the Wage Act were passed and the federal hourly minimum wage increased to $15 by 2025, we estimate that annual government expenditures on major public assistance programs would fall by between $13.4 billion and $31.0 billion.
Raising the Minimum Wage
Raising the minimum wage to $15 is popular among a large majority of voters, especially those in competitive congressional districts. Recent increases in inflation make the matter more urgent. In 2021 inflation reached a 39 year high of 7%, according to Labor Department data. This is the largest 12-month gain since June 1982.
Both the federal minimum wage and higher local minimums lag so far behind inflation that current proposed increases are too little too late.
For example, in high cost areas a $15 minimum wage would be barely enough for self-sufficiency. According to the Economic Policy Institute Family Budget Calculator by 2025, $15 an hour will likely be the bare minimum for a single adult with no children to maintain a “secure yet modest” standard of living anywhere in the United States.