By Rick Newman
The debate seems to be intensifying over whether the U.S. minimum wage is too low, too high or just right. But compared with the minimum wage in other countries, it’s nearly the lowest in the developed world.
Earlier this month, President Obama signed an executive order raising the minimum hourly wage for new federal contractors from $7.25 to $10.10, fulfilling a promise he made in his State of the Union speech to hike pay where he could without the approval of Congress. That move affects a very small percentage of people, but it could generate momentum for a broader effort to do the same thing nationwide, as one bill pending in Congress would do.
Even so, the U.S. minimum wage has fallen far behind what other countries pay. Data from the Organization for Economic Cooperation and Development shows the federal minimum wage of $7.25 per hour ranks 26th out of 27 countries, when measured as a percentage of the average wage in each of those countries. Canada, most European nations, and Asian powerhouses such as Japan and South Korea all have a higher minimum wage, relative to average pay. Here’s a chart showing the data for 2012, the latest available,with the second bar from the right representing the United States:
Minimum Wage as a Portion of the Average Wage
On a dollar basis, the U.S. minimum wage is slightly above average when adjusted for differences in purchasing power among countries. That puts the U.S minimum above the wage in Japan and Spain, plus less-developed nations such as Poland and Turkey. But even by that measure, it’s still below the minimum wage in Australia, the Netherlands, the U.K. and several other countries.
No matter how U.S. pay levels compare with those in other countries, the minimum wage is a combative issue here at home, with advocates for business arguing that raising the wage will threaten profits that are already thin, leading many firms to hire fewer workers. The nonpartisan Congressional Budget Office recently found that raising the minimum wage to $10.10, as one Senate bill would do, would lift 900,000 families out of poverty but also cost the economy 500,000 jobs. One pro-business TV commercial warns that raising the wage will compel more businesses to replace human workers with tablet devices and other technology.
But some economists feel the threat to the economy is overblown. “Arguments that lifting the minimum wage will cost low-income workers their jobs are significantly overstated,” writes Mark Zandi of Moody’s Analytics. “While raising the minimum wage has probably eliminated some jobs for very low-skilled workers, this loss has been marginal.”
Outside of Washington, there’s less controversy over the issue. About 20 states already have a minimum wage that’s above the national average. Retailers such as Costco (COST), Whole Foods (WFM) and the Gap (GPS) have said they’ll set wages above the federal minimum, because it reduces employee turnover. Polls show that three-quarters of Americans favor raising the minimum wage. Even 43% percent of small-business owners — who, in theory would have the most to lose if the minimum wage went up — support hiking it.
A big part of the problem with the U.S. minimum wage is that it’s not indexed to inflation — the way Social Security is — so instead of rising automatically as living costs go up, it requires an act of Congress every few years to raise it. That generates repeated political tussles such as the one brewing in Washington now. Ten U.S. states do index their minimum wage to inflation, as do several other countries.
The Senate bill, which Obama supports, would raise the minimum wage to $10.10 in stages over two years, then link increases to the rate of inflation, eliminating the need for future votes on the issue in Congress. Most Congressional Republicans oppose the bill, but it could still pass if a handful of Republicans join most Democrats in voting for it.
Last year Obama called for hiking the minimum wage to a mere $9 an hour, before he signed on to the more aggressive Senate bill and signed the order raising contractor pay. That suggests a possible compromise could emerge on a nationwide minimum wage — at some level lower than $10.10 — allowing Republicans to claim a modest victory.
Still, Congress is a place where national priorities go to die, so it’s also possible the United States could end up 27th out of 27 before long.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.