What Does the Minimum Wage Do?

5 - Wages and Earnings

183 5 Wages and Earnings How do increases in the minimum wage affect wages, earnings, and income? On its face, the answer is obvious: Those who are earning less than the new minimum wage will see their hourly rates rise, and if the effect on hours is not too severe, their earnings will also rise, as will their household incomes. Once we know the effect on employment and hours, straightforward calculations provide the answers to our question on wages, earnings, and income. Case closed. Or is it? The effect of the minimum wage on earnings may reach further into the wage distribution and pose more challenging measurement issues . For example, does the minimum wage affect the earnings of those who, prior to the increase, earned slightly more than the new minimum? Are their wages unchanged, or do they too rise with the increase in the minimum wage? Another issue is whether increases in the minimum wage have a meaningful effect over time on the earnings of those affected by the minimum wage. If the pay of those at the minimum wage rises rapidly after they are first hired, then the minimum wage can only modestly improve their earnings trajectories and incomes over time. If the wages of those earning the minimum wage remain close to the minimum for extended periods, an increase in the minimum wage will result in a meaningful increase in both current and future earnings. There are a number of such issues, and, as a result, the case is not quite as easy to close as it seemed initially. Our discussion of wage effects is organized around six questions: 1) How is the average wage affected by the minimum wage? 2) How does the minimum wage affect the wages of those who are at or below the new minimum wage? 3) How does the minimum wage affect the wages of those who, prior to an increase, were earning more than the new minimum wage? 4) What are the dynamics of wage increases of those who are at or are close to the minimum wage? Belman and Wolfson.indb 183 Belman and Wolfson.indb 183 6/16/2014 12:11:47 PM 6/16/2014 12:11:47 PM 184 Belman and Wolfson 5) How does the minimumwage affect the distribution of earnings? 6) How does the minimum wage affect the income of low-income households, particularly those at or near the poverty line? Answers to these questions provide a comprehensive portrait of the impact of the minimum wage on wages, earnings, and income. In this chapter we limit ourselves to the first three questions; the questions on wage dynamics, wage growth, inequality, and poverty are addressed in later chapters. Before turning to these three questions, we address issues regarding measurement of wage effects and introduce some data on the minimum wage in the United States. MEASURING THE EFFECTS OF THE MINIMUM WAGE The interest of readers is seldom peaked with substantive discussion of definitions. However, the terms wages and earnings are used inconsistently across studies, and it is often challenging to know what is being measured. In order to better navigate the rough semantic terrain, we have to define how these terms will be used in this review, and then we discuss each of the studies using our terminology. For the purposes of this review, wage rate refers to the straight-time hourly wage an individual is paid. Earnings is the pretax amount an employee receives in her paychecks over some period. For those paid weekly (or biweekly or monthly), hourly earnings would be the amount they are paid per week (or fortnight or month) divided by the number of hours they worked that week (or fortnight or month). For those paid by the hour, hourly earnings might also be their wage rate, but if they worked overtime at time and one-half or better, hourly earnings might be greater than their wage rate. While earnings can be computed for all employees, wage rates are only available for those who are paid by the hour.1 In this review, we use wages as a general term referring to employee pay. It encompasses both wage rates and earnings, but, unlike wage rates or earnings, it is not a specific measure. Payments for benefits and for the employer share of payroll taxes are not included in any of these measures.2 A challenge to measuring the effect of the minimum wage on wages is that observed and average wages...