Index the Minimum Wage at $6.50

Kevin Drum unloaded on Scott McClellan and President Bush for their opposition to raising the minimum wage from $5.15 to $6.25:

Whoa, Nelly! Sure, it’s been eight years since the last increase to the minimum wage, but even so an increase of $1.10 over an 18-month period might “price people out of the job market.” Yeah, that’s the ticket. It might price them out of the job market. That must be a helluva job market President Bush has bequeathed us. It’s a shame he’s not part of it.

The Almanac of Policy Issues reminds us that one proposal would have raised the minimum wage to $6.65:

Congress is currently considering raising the minimum wage by $1.50, from $5.15 to $6.65 per hour in three installments. Congress last enacted legislation in 1996, increasing the minimum wage by 90 cents from 1996-1997. The minimum wage was first enacted in 1938 as part of the Fair Labor Standards Act (FLSA). It is enforced by the U.S. Department of Labor’s Employment Standards Administration. Initially just 25 cents per hour, the minimum wage has been raised several times in the decades since. In real (inflation-adjusted) terms, the minimum wage reached its peak in 1968, when it was worth $6.92 in 1998 dollars.

They also provide a short summary of the arguments for and against increasing the real value of the minimum wage. The Economic Policy Institute has a nice issues guide, which has all sorts of cool charts including the history of the nominal value of the minimum wage, this wage relative to the average hourly wage, and a chart of the real value in terms of 2004 dollars, which we show here.

This chart shows that the real value of the minimum wage peaked in 1968 at $7.25 and was near $7 in 1980. With the nominal value unchanged throughout the 1980’s, the real value of the minimum wage was eroded to below $5 by a rising price-level before its nominal value was increased from $3.35 to $3.80 in 1990. Its current nominal level of $5.15 was set in 1997, which increased its real value to $6. The real value currently is just over $5 and if the nominal value is not increased before 2007, the real value will fall to $4.77 (I’m assuming prices in 2007 with be 8% higher than they were in 2004).

The proposal that the Senate rejected would have raised the minimum wage to a real value of only $5.80 in 2007. The Democratic proposal to set the minimum wage at $6.65 by 2007 translates into a real value of $6.15. So let’s compromise and have the real value indexed at $6 per hour in terms of 2004$, which mean a 2007 nominal value of $6.50. But President Bush might argue that increasing the real value of the minimum wage would cause an increase in unemployment – right?

Then again – we have heard a lot of nonsense about macroeconomics from this White House. The highest real value of the minimum wage occurred during the same year that we had a very low unemployment rate. The most recent increase in the real value of the minimum wage preceded the economic boom during the second Clinton term. And despite the decline in the real value of the minimum wage during Bush’s first term, the labor market has been weak. The state of the labor market depends more on overall macroeconomic policies. Alas, this Administration is clueless as to how to restore full employment – assuming that they even care about the labor market.