The missing piece of the minimum wage debate

The missing piece of the minimum wage debate

History shows that boosting the minimum wage leads to consumer spending

By Colleen Doody

Colleen Doody is associate professor of history at DePaul University and a public voices fellow of The OpEd Project.

Feb. 25, 2021 at 8:00 p.m. GMT+9

As part of his massive $1.9 trillion emergency pandemic relief plan, President Biden called on Congress to raise the federal minimum wage to $15 an hour from the current $7.25. Democratic senators are waiting for a ruling from the Senate parliamentarian on whether such a provision can be in the relief bill and debating whether to raise the minimum wage to $15 or some lower amount.

The debate over a minimum-wage increase has been fierce. Supporters claim raising the minimum wage would benefit women and people of color — the very demographics hurt the most by the coronavirus pandemic.

Yet opponents argue it would increase unemployment because higher wages would force small businesses, already under economic duress because of the pandemic, to lay off employees.

This conversation, however, ignores just what increasing the minimum wage does to the larger economy. To understand the intent of the federal minimum wage, it is necessary to look at the original minimum wage legislation — the 1938 Fair Labor Standards Act (FLSA), an enduring part of President Franklin D. Roosevelt’s New Deal.

As with much New Deal legislation, the aim was to create what New Dealers called purchasing power. The basic idea: Raising wages would increase consumption, thus giving businesses the incentive to hire more workers. It worked, reminding us today that mandating higher wages doesn’t just increase standards of living. It boosts the economy.

Many New Dealers believed the Great Depression was caused by underconsumption. Productivity among American manufacturers doubled during the 1920s while wages lagged. As American manufacturers churned out increasing numbers of consumer durables, particularly automobiles, consumer spending did not keep up. Businesses couldn’t sell their inventories, and so they began cutting costs and laying off workers. The economy spiraled downward.

Advocates of increased purchasing power argued that raising wages would increase consumption, thus giving businesses the incentive to hire workers. Edward Filene, the founder of the Filene’s department store chain and an advocate for boosting consumption, argued that “increased production demands increased buying.” According to Filene, “the greatest total profits can be obtained only if the masses can and do enjoy a higher and ever higher standard of living. Mass production is production for the masses.”

Roosevelt agreed. In his 1938 State of the Union address, he explained that when millions of workers receive “pay so low that they have little buying power” they were unable to “buy their share of manufactured goods.” Raising wages would stimulate the national economy by allowing workers to purchase the goods and services they produced. Because the national economy depended on consumer spending, helping consumers buy would bene­­fit the nation as a whole.

Minimum-wage legislation, Roosevelt argued, was thus “an essential part of economic recovery.” Congress agreed and passed the 1938 Fair Labor Standards Act, which created the first federal minimum wage (25 cents per hour, to increase to between 30 and 40 cents per hour) and restricted the workweek to 44 hours. After Roosevelt signed the bill, he said in one of his fireside chats, “Without question it starts us toward a better standard of living and increases purchasing power to buy the products of farm and factory.”

Along with stabilizing the economy to avoid the recurring economic downturns the nation suffered regularly between the 1870s and 1930s, a nationwide minimum wage would improve the quality of life for the poorest areas of the country. Communities where the average wages were low, Roosevelt pointed out, also had the “poorest educational facilities and the worst conditions of health” because their tax base was inadequate to support a functioning local government.

That was especially true for the South. The per capita income in Mississippi, for example, was $216 in 1940, compared with $676 in Michigan. At the same time, the life expectancy at birth in Mississippi was 60.7 years, while it was 63.4 years for men and 64.4 years for women in Michigan. The per capita income in South Carolina was $301 compared with $648 in Pennsylvania. The number of women in South Carolina who died during childbirth was more than twice the rate in Pennsylvania. The statistics certainly supported Roosevelt’s assertion that low wages and poor health conditions went hand in hand. Not surprisingly, the FLSA had its greatest impact in the South, where 54 percent of the workers earning less than 30 cents per hour in 1939 were located.

Southern Democratic congressmen, whose business constituents embraced the region’s low wages as a way to attract Northern businesses, objected to the law. They recognized that a federally mandated wage threatened legal segregation. Rep. Martin Dies (D-Tex.), for example, complained about the FSLA because “what is prescribed for one race must be prescribed for the others, and you cannot prescribe the same wages for the black man as for the white man.”

To get the bill through Congress, Roosevelt caved to Southern segregationists. The Roosevelt administration modified the legislation to ensure it passed Congress, notably excluding farmworkers and domestic workers, two professions that were heavily African American, from its provisions. As a result of these Jim Crow policies, many Southern African Americans didn’t earn the minimum wage. While Roosevelt sought to raise the living standard in the poorest region of the country, he was unwilling to challenge the system of legal segregation that kept Southern wages so low.

The FSLA applied only to employers involved in interstate commerce and so did not cover service employees, many of whom were women. As with other key New Deal laws like the Social Security Act, many women and minorities were therefore deprived of the legal protections the FLSA provided.

Despite its very real shortcomings, the federal minimum wage along with other New Deal programs helped lead to the doubling of inflation-adjusted income for the bottom 20th percentile of wage workers between the end of World War II and the mid-1970s. That increase went hand-in-hand with relatively widely shared national prosperity during this period.

However, since the 1970s, overall economic growth has decreased while the income gap has widened. Those at the very top have seen their income and wealth increase dramatically while those at the bottom have struggled to stay afloat.

These long-term issues have been exacerbated by the pandemic. According to the Bureau of Labor Statistics, 10.1 million people are unemployed, up from 5.7 million at the start of the pandemic. The weak job numbers for January appear to show the recovery slowing, even as coronavirus rates have decreased. And the unemployment rate for African Americans (9.2 percent) and Latinos (8.6 percent) remains far higher than for Whites (5.7 percent). Over 2 million women, particularly women in traditionally low-paying service jobs, have left the labor force in the past year. All of these troubling statistics point to the need for action.

In the current debate over the $15 minimum wage, it is important to consider the type of economy that is best for most Americans. Is the intent to increase purchasing power and expand the population of workers who can afford to buy the goods and services they produce, as the New Deal did? Or is the goal to maintain an economy that ensures the lowest-paid Americans can barely afford food and shelter?

The choice seems obvious.