Why a minimum raise hike and overtime pay are important

In today’s sluggish job market, many American workers face three big hurdles: job quantity, job quality, and the growing gap between those at the top and everyone else.

With full employment, employers would bid wages up to get and keep the workers they need, and that would help ameliorate all three of these problems.  By definition, full employment means more jobs, but tight labor markets also enforce a more equitable distribution of growth along with stronger wage and income gains for those in the bottom half of the workforce – the very workers who’ve been left behind in recent years.

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The problem is that since the late 1970s, full employment has proved to be a very elusive goal.  From the late 1940’s to the late 1970’s, the job market was at full employment 70 percent of the time; since then, those conditions have prevailed only 30 percent of the time.  It is no coincidence that the earlier period is associated with broadly shared prosperity while the latter is associated with growing inequality.

Clearly, the fight for policies to promote full employment is essential, but working households can’t wait for that battle to be won, especially in an era of intense partisan gridlock.  So policymakers must work on interim measures, particularly those related to job quality.

That’s why proposals to raise the minimum wage and give more workers access to overtime pay have made headlines recently.  Taken together, these measures target low- and middle-wage workers in ways that will help improve the quality of their jobs and push against inequality.

For example, minimum wage increases can be a significant source of upward pressure on wages.  When workers on the bottom get an increase, firms have to raise wages for workers just above them, and so on up the ladder.  If, for example, the minimum wage rose to $10.10 an hour, the “spillover effect” would induce a wage increase for about 11 million workers in addition to nearly 17 million who would get a direct increase.

Also, it’s vitally important to index the minimum wage to inflation. Since 2009, inflation has reduced the purchasing power of minimum wage workers and undermined wages for workers further up the scale. Employers have been able to maintain the spread between entry level minimum wages and the next rungs on the ladder without raising wages at all.

Clearly, however, it does little good to index the minimum wage from a level that’s so low that no one can live on it.  Although the nation is richer and minimum wage workers are better educated than in the past, the average value of the minimum wage in the first decade of the 2000’s was $1.56 per hour less than in the 1970’s. Low wage workers are far better educated than they were in the 1970’s, when 75 percent had only a high school education or less, versus 57 percent today. Their wages should be higher in real terms to reflect their greater educational attainment.

The minimum wage also should maintain some rough parity with productivity (a measure of how much the average worker produces each hour), because productivity increases determine the nation’s capacity to grow its economy.

Our goal should be shared prosperity – where every worker’s income grows as the nation’s income grows. Since productivity has grown by 80 percent since 1973, the minimum wage should be about 80 percent higher in real terms than in 1973.  Instead of $7.25, it would be $15.15

The rules for overtime pay would also benefit from a policy update.  Currently, employers are required to pay workers 150 percent of the regulate rate of pay for any time they work beyond 40 hours in a week.  However, professional, administrative and executive employees who make more than $455 a week are “exempt” from both overtime pay and minimum wage provisions.

An estimated 19-26 million workers (20-27 percent of the full-time workforce) are covered by these exemptions since adjustments for wage growth and inflation have been sporadic over the years. The current threshold of $455 a week amounts to $23,660 a year, which is less than the poverty level for a family of four, and a salary far below what a true executive or professional would be paid.

Raising the salary threshold for exemption to $980 per week and indexing it to inflation would mean that an estimated 5-10 million salaried workers would receive a new right to overtime pay.

These days, anyone who wants to sell a policy idea ties it to job creation.  Though some of these sales pitches, like supply-side tax cuts for wealthy “job-creators,” are clearly opportunistic, the policy debate reflects the need to boost job quantity.  But quality matters too. A higher minimum wage and a fairer system of overtime could make meaningful gains in that part of the problem.

Eisenbrey is vice president of the Economic Policy Institute and author of the upcoming paper: “Improving the quality of jobs through better labor standards.”  He is participating in the Center on Budget and Policy Priorities national dialogue on full employment, to take place April 2 at the National Press Club in Washington, D.C.