How Minimum Wage Affects Purchasing Power and Living Conditions

The minimum wage was initially set by the Fair Labor Standards Act in 1938 to establish a standard amount that employees could pay their workers. At that time, the minimum wage was only a quarter of a dollar. Minimum wage was also established in order to raise wages every so often to coincide with the rising cost of living. The question is, how well can people live on minimum wage? This standard wage has only been raised twenty-two times since its original proposal almost eight decades ago (Konen). Meanwhile, the cost of living continues to rise, and people get less for their dollar nowadays. Minimum wage has diminished purchasing power in the United States, and it has also contributed to poor and deplorable living conditions for many American families across the country.

Any increases to the federal minimum wage were delegated to the Congress as well as the President of the United States. However, Congress made the decision to forgo tying the rate of inflation to minimum wage. Thus, when inflation is factored into the minimum wage paid to workers, the wage decreases and is worthless in the current economy. The wage is actually 25 percent lower today than it was in 1968.

Inflation must be factored into the minimum wage because it directly affects purchasing power in this country. Since purchasing power basically involves how much one can get for their money, inflation influences minimum wage and what people can afford. Decades ago, a person could buy more items with a certain amount of money than they could today. This is because the minimum wage has not been raised and properly adjusted to meet rising inflation.

According to the United States Department of Labor website, the federal minimum wage is $7.25 per hour and has been since July 24, 2009. Many states also have different minimum wage laws, such as California and Nevada. The current minimum wage of $7.25 has about half the purchasing power than it did fifty years ago. In 1938, “minimum wage would be worth $4.07 today” (Kurtz). In 1948, minimum wage “had its lowest buying power when it was worth about $3.81 in today's dollars. It had its highest buying power in 1968 when it was worth about $10.56. At $7.25 in 2012, our current minimum wage is in the middle of those two extremes” (Kurtz). So, while purchasing power in the United States is not at its ultimate lowest, it is still worth a great deal less than decades ago. All of this affects the living conditions of countless families in the country.

The minimum wage also has detrimental effects on the demand for labor in the United States, which also affects purchasing power and living conditions. If an employer is required by law to pay workers $7.25 an hour, it can be assumed that “they will only hire a worker if the worker’s marginal revenue product is greater than the wage” (Grimes, Register, & Sharpe 84.)This is a surefire way that that the quantity of labor demanded will fall because of a minimum wage increase. If the amount of labor demand falls, unemployment will inevitably be a problem thereafter. It can be assumed that minimum wage is an indirect cause of unemployment.

Minimum wage and its effect on labor also result in a few individuals who control much of the purchasing power in the U.S. The wealthy employers have the power to control much of the labor in the country; therefore, they have command over purchasing power as well. Meanwhile, their workers’ wages do not go up, but the price level increases. The result is that the purchasing power of the workers’ income ultimately falls. The labor commanders have power over the people, and they can then trade their money for the labor and services that they need.

Because the purchasing power of minimum wage workers is falling and the cost of living is rising, it can be assumed that many people simply cannot afford what they need to live. It is also clear that only a small percentage of people in the United States can afford to live a good life with adequate housing, food, and amenities. Meanwhile, many blue-collar workers are barely scraping by or they are not able to make it at all. What ultimately happens to these workers? They lose their apartments, their vehicles, their utilities. Most of all, they lose their dignity because they cannot support themselves much less their families. They have no purchasing power, and no power to do anything about it. This can lead to frustration, depression, and hopelessness, all of which can only exacerbate their situation. It is basically a no-win type of situation especially for those who do not have labor skills and/or education required for jobs that pay minimum wage.

Housing costs alone can barely be covered under the current minimum wage. Konen’s article brings up the fact that the U.S. Department of Housing and Urban Development (HUD) recommends that a household should not apply more than a quarter of their gross income towards rent. However, “almost no one earning minimum wage would be able to pay the national median rent using that formula” (Konen). Furthermore, many people making minimum wage cannot pay their other monthly bills if they do manage to make rent.

Last year, McDonald’s composed a sample budget for workers that made headlines and offended many of their workers. In an article for CBS Charlotte, Jaworksi notes that the sample budget “seemed to highlight the near impossibility of surviving on that level of pay.” If a worker completes a full work week of forty hours, they will make about $250 a week after taxes. This adds up to around $1000 a month. According to the U.S. Department of Housing and Urban Development’s formula for rent amount, a household should not spend more than $250 a month for rent. This amount is laughable when considering that “at $500 a month in rent, a person can expect to live in an undesirable apartment complex which will more than likely be in an unsafe part of town. The only real exception to this rule is if the minimum wage worker has a roommate or partner that they reside with” (Jaworksi). One must also factor in the cost of utilities for the residence. And most importantly, the cost of food must be considered. If a person cannot get the proper nutrition, they will not be able to work efficiently, which will cut into their pay or perhaps get them fired. It seems like a vicious cycle, and for good reason.

In addition to the cost of rent and food, one must consider other costs such as “credit card bills, health care costs/bills, an emergency situation, or other bills” (Jaworksi). It is nearly impossible for a person making minimum wage to live a normal life in a decent neighborhood all while having the necessary amenities and healthy food to eat. The reality is that minimum wage workers cannot support themselves under the current system, much less support a family in addition to themselves.

A 28-year-old McDonald’s worker in Kansas City gives a firsthand account in a Forbes.com article. The worker says in the transcript that she is not even given forty hours to work at McDonald’s, and her schedule consists of as few as eighteen hours a week. Meanwhile, her rent is $650 a month and she has four children to care for and feed. When asked if she can ever pay her rent that she is three months behind on, she responds, “Sometimes I can pay it, sometimes I can’t. I get paid twice a month, and both checks go to rent and the rest of it goes to utilities to the point where I don’t have any money left to buy anything for my kids — to buy them clothes, shoes or anything they need” (Shin). Acceptable and appropriate living conditions seem to be downright unattainable for those making minimum wage.

In conclusion, the minimum wage does not make it possible for people to attain living conditions that are not deplorable and unhealthy. Minimum wage also contributes to diminished purchasing power, and it is worthless now than it was decades ago. It has been proposed that the federal minimum wage be raised to meet the rising costs of living, but whether it will be adjusted accordingly remains to be seen.

Works Cited

Jaworksi, Nicole. "Poverty in America: How Do Americans Survive on Minimum Wage?" CBS Charlotte. 6 July 2013. http://charlotte.cbslocal.com/2013/07/06/poverty-in-america-how-do-americans-survive-on-minimum-wage/. Accessed 18 Mar. 2014.

Konen, Leah. "How Well Can You Live on Minimum Wage? The Fiscal Times." The Fiscal Times. 5 Apr. 2012. http://www.thefiscaltimes.com/Articles/2012/04/05/How-Well-Can-You-Live-on-Minimum-Wage#sthash.E72KtBdt.dpuf. Accessed 18 Mar. 2014.

Kurtz, Annalynn. "A History of the Minimum Wage Since 1938." Economy RSS. 14 Feb. 2013. http://economy.money.cnn.com/2013/02/14/minimum-wage-history/. Accessed 16 Mar. 2014.

"Minimum Wage - Wage and Hour Division (WHD) - U.S. Department of Labor." Minimum Wage - Wage and Hour Division (WHD) - U.S. Department of Labor. N.d. http://www.dol.gov/whd/minimumwage.htm. Accessed 16 Mar. 2014.

Sharp, Ansel M., Charles A. Register, and Paul W. Grimes. "Government Control of Prices in Mixed Systems." Economics of Social Issues. 20th ed. New York: Macgraw-Hill Irwin, 2013. pp. 84-88.

Shin, Laura. "How She Lives on Minimum Wage: One McDonald's Worker's Budget." Forbes. 19 July 2013. http://www.forbes.com/sites/laurashin/2013/07/19/how-she-lives-on-minimum-wage-one-mcdonalds-workers-budget/. Accessed 17 Mar. 2014.