Nearly a million low-wage workers in 10 states will get a modest raise this
year. In Rhode Island, a new law has raised the state’s minimum wage by 35 cents
an hour, to $7.75, which will work out to an average annual raise of $510 for
11,000 Rhode Islanders. In nine other states — Arizona, Colorado, Florida,
Missouri, Montana, Ohio, Oregon, Vermont and Washington — laws that peg the
minimum wage to inflation will result in increases of 10 cents to 15 cents an
hour, for hourly wages ranging from $7.35 in Missouri to $9.19 in Washington.
By contrast, the federal minimum wage has been stuck at $7.25 an hour since
2009. In all, 19 states and the District of Columbia set their minimums above
that level, providing a much needed lift for the lowest-paid workers. But
state efforts are no substitute for a higher federal minimum because the ability
to earn a minimally acceptable income should not depend on where a worker lives.
Will Congress finally raise the federal minimum wage this year? It would be the
least that lawmakers could do. In the fiscal cliff deal, lawmakers locked in big
tax breaks for wealthy investors and for heirs of multimillion-dollar estates.
At the same time, they allowed the payroll tax cut for low- and middle-income
taxpayers to expire, without enacting new provisions to ease the blow. The
lowest-paid workers will be hit the hardest. In the states that raised their
minimum wage this year, much of the increase will be eaten up by the higher
payroll tax. In the other states, paychecks will simply be smaller.
Efforts to raise the minimum invariably run into arguments that employers,
especially small businesses, cannot afford to pay a higher wage. But the
evidence shows that most low-wage employees work for large companies, which have
largely recovered from the recession and have reinstituted generous pay packages
for executives. As for low-wage workers at small businesses, many are waitresses
and other “tipped” workers for whom the federal minimum wage is $2.13 an hour,
where it has been since 1991. Clearly, there is ample room for an increase.
A related argument is that a higher minimum wage destroys jobs, especially
employment for teenagers. But research shows that most low-wage workers are over
the age of 20 and suggests that paying them a higher wage could actually create
jobs by bolstering consumer spending.
A higher minimum wage is also an obvious way to counter the accelerating trend
toward low-wage work and growing income inequality. For decades, various forces,
including the decline in unionization and the global competition for jobs, have
pushed down wages in the United States. But the situation has become worse in
the last few years, as most of the middle-wage jobs lost during the recession
have been replaced with lower-paid work.
Raising the minimum wage is always a fight. Congress has approved legislation to
do so only three times in the last 30 years. President Obama promised to take on
this fight back in 2008, when he called for a federal minimum wage of $9.50 an
hour by 2011, indexed to inflation. It is past time to keep the promise.
It is possible, for the first time in weeks, to imagine that
the credit crisis may be about to ease. But one of the big lessons of the last
year has been not to underestimate the severity of the economy’s problems. Those
problems are not just about housing or Wall Street.
What, then, will the next stage of the downturn be about? It is likely to
revolve around the worst slump in worker pay since — you knew this was coming —
the Great Depression. This slump won’t be anywhere near as bad as the one during
the Depression, but it also won’t be like anything the country has experienced
in a long time.
Income for the median household — the one in the dead middle of the income
distribution — will probably be lower in 2010 than it was, amazingly enough, a
full decade earlier. That hasn’t happened since the 1930s. Already, median pay
today is slightly lower than it was in 2000, and by 2010, could end up more than
5 percent lower than its old peak.
If you look back at poll results over the last few decades, you will see that
nothing predicts the public mood quite like income growth.
When incomes are growing at a good clip, as they were in the mid-1980s and late
’90s, Americans are upbeat. When incomes stagnate, as they did in the early
’80s, early ’90s and in the last several years, people get worried about the
state of the country. In the latest New York Times/CBS News poll, 89 percent of
respondents said that the country had “pretty seriously gotten off on the wrong
track,” a record high.
So it’s reasonable to expect that the great pay slump of the early 21st century
is going to have a big effect on the next several years. Falling pay will weigh
on living standards, consumer spending and economic growth and will help set the
political atmosphere that awaits the next president.
The events of the last several weeks have removed any serious doubt that the
economy is in a recession. In a recession, businesses cut back on their workers’
hours, hand out raises that don’t keep pace with inflation and often skip paying
bonuses. These cuts in hours and pay are the main way that a downturn affects
families, because only a small share of workers actually lose their jobs.
As the chart next to this column makes clear, every recent recession has brought
an effective pay cut of somewhere between 3 and 7 percent for the typical
family. The drop typically happens over a period of about three years, lasting
longer than the recession officially does, as pay fails to keep up with
The recent turmoil — the freezing up of credit markets, the fall in stock
markets, the acceleration of layoffs — has made it unlikely that the coming
recession will be a particularly mild one.
“The biggest hit will be in 2009,” Nariman Behravesh, the chief economist of
Global Insight, a research and forecasting firm, told me, “and it probably won’t
be until 2011 until we see any kind of pay gains.”
What will make this recession different, no matter how deep or shallow it is, is
that it’s following an expansion in which most families received little or no
raise. The median household made $50,200 last year, slightly less than the
$50,600 that the equivalent household earned in 2000, according to the Census
Bureau. That’s the first time on record that income failed to set a new record
in an economic expansion.
Why has it happened? There is no single cause.
Medical costs have risen rapidly, which means that health insurance premiums
take up a bigger chunk of workers’ paychecks than they used to. Some of this
money goes to good use; it pays for treatments that weren’t available even a few
years ago. But some of it, the part that disappears into the inefficient
American health care system, is clearly wasted.
And in the last couple of years, the value of the typical worker’s benefits
package has stopped growing. Since 2005, benefits packages have become slightly
smaller, notes Jared Bernstein of the Economic Policy Institute. So health
benefits can’t come close to explaining the recent pay stagnation.
The bigger factors are probably some combination of the following: new
technologies, global trade, slowing gains in educational attainment, the rise of
single-parent families, the continued decline in unionization and the sharp
increase in inequality, which has concentrated income gains at the top of the
ladder. Your political views will probably determine the relative weights that
you assign to those causes. Economic research hasn’t yet definitively answered
Whatever the cause, though, the effects of the pay slump are going to be
significant. Households have already begun to cut back their spending, and they
will do so even more next year. Mr. Behravesh predicts that inflation-adjusted
consumer spending in 2009 will be somewhere between flat and down 1 percent. If
he’s right, it would be the first year that consumer spending didn’t grow since
1980, which just happens to be the last time that the country suffered through a
The pay slump will also make it harder for people to pay off their loans. Last
week, Bank of America reported that its losses on consumer credit had tripled
over the last year.
In all, banks around the world have acknowledged $600 billion in losses as part
of the financial crisis. The latest International Monetary Fund analysis
suggests they still have another $800 billion in losses ahead of them — and a
good chunk of them will occur in this country.
It’s always possible, of course, that some bit of good and unexpected economic
news is just around the corner. The situation also seemed pretty dire in the
mid-1990s, until the Internet boom came along and incomes then started rising at
their fastest pace since the 1960s.
But you would have to be a pretty zealous optimist to forecast a repeat of that
story. For two decades, consumer spending has been an enormous driver of
economic growth, thanks in good measure to a long bull market, a housing bubble
and a boom in consumer debt.
The bull market, the housing bubble and the debt boom have all ended — and now
paychecks are shrinking, too.
At some point, the next big economic engine will indeed arrive. It always does.
This time, however, it’s going to have some stiff head winds to overcome.