THE BLOG
12/04/2014 07:46 pm ET Updated Feb 03, 2015

What to Do About the Minimum Wage

Raising the minimum wage is often framed as a classic business-versus-workers issue. But even strictly from the workers' point of view, there is a delicate balance to be maintained. Raising the minimum wage can make it easier for workers to make ends meet, but raising it too much can cost them their jobs.

So, the question isn't just whether the minimum wage should be raised. Perhaps the more important question is if so, by how much?

MoneyRates.com has conducted a study of minimum wage levels and changes over the past 50 years, with a focus on the effect of inflation and the effect of raising the minimum wage on employment. The result suggests where the correct balance might be -- the right level for the minimum wage.

Arguments for and against raising the minimum wage

The argument for raising the minimum wage starts with fairness. People working full-time deserve a little more than just living paycheck to paycheck. There is also an economic argument to be made, as that extra money put into the hands of the relatively poor is more likely to get spent, so an increase in the minimum wage would help inject more money back into the economy.

On the other hand, some feel that in a free market, wages should be set naturally without government interference. From a less ideological standpoint, economists would point out that raising the cost of labor is likely to decrease the number of jobs. Indeed, minimum wage increases over the past 50 years have been followed by an average rise in unemployment of 0.8 percent over the next 12 months.

President Obama has proposed raising the minimum wage to $10.10 an hour. At 39 percent, this would represent the steepest single increase in the past 50 years. On the other hand, with Republicans winning control of the Senate, opposition to raising the minimum wage at all will gain strength.

Is there a sensible middle ground between these two extremes? History suggests that there is.

Choosing a new minimum wage

During the past 50 years, there have been 16 increases in the federal minimum wage. Adjusted for inflation, these increases have raised the minimum wage to an average value in today's dollars of about $8.82 cents. So, at $7.25, the current minimum wage has clearly fallen a little behind. This historical precedent supports the argument for raising the minimum wage.

Why not do a little better for workers than just matching that average? Here's where the balance gets delicate.

When minimum wage increases have pushed the wage above that inflation-adjusted $8.82 average, the unemployment rate over the next 12 months has risen by an average of 1.1 percent. When minimum wage increases have kept the wage below the inflation-adjusted level of $8.82, the rise in unemployment has been by a milder 0.4 percent. The right balance seems to lie in raising the minimum wage to a level that approaches -- but does not exceed -- that historical average, perhaps to $8.80.

In short, an $8.80 minimum wage seems to be both in tune with historical norms and an appropriate middle ground between outright opposition to raising the minimum wage and the president's proposal to raise it to $10.10 cents. However, arriving at this middle ground will require something that has been in desperately short supply in government lately: compromise.

Also by Richard Barrington: