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What sets wages

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I often ask students or people attending my lectures to guess the proportion of the US work force that earns the Federal minimum wage or less. The median guess is usually around 20%. In 2006 (the latest numbers available), the BLS reports [2] that the answer was 2.2%:

According to Current Population Survey estimates for 2006, 76.5
million American workers were paid at hourly rates, representing 59.7
percent of all wage and salary workers.1 [3]
Of those paid by the hour, 409,000 were reported as earning exactly
$5.15, the prevailing Federal minimum wage. Another 1.3 million were
reported as earning wages below the minimum.2 [4]
Together, these 1.7 million workers with wages at or below the minimum
made up 2.2 percent of all hourly-paid workers. Tables 1-10 present
data on a wide array of demographic and socioeconomic characteristics
for hourly-paid workers earning at or below the Federal minimum wage.
The following are some highlights from the 2006 data.

  • Minimum wage workers tend to be young. About half of workers
    earning $5.15 or less were under age 25, and about one-fourth of
    workers earning at or below the minimum wage were age 16-19. Among
    employed teenagers, about 8 percent earned $5.15 or less. About 1
    percent of workers age 25 and over earned the minimum wage or less.
    Among those age 65 and over, the proportion was about 2 percent. (See table 1 [5] and table 7 [6].)
  • About 3 percent of women paid hourly rates reported wages at or
    below the prevailing Federal minimum, compared with under 2 percent of
    men. (See table 1 [5].)
  • About 2 percent of white, black, and Hispanic hourly-paid workers
    earned $5.15 or less. Among Asian hourly-paid workers, about 1 percent
    earned the Federal minimum wage or less. For whites, women were twice
    as likely as men to earn $5.15 or less. (See table 1 [5].)

Because this is only for workers who are paid hourly, the actual proportion is probably much lower than 2.2%.

And this does include some illegal immigrants These numbers are taken from the CPS that tries to capture a representative sample of all residents. Of course, it may not capture illegal immigrants precisely—I’d assume illegal immigrants try and find ways to avoid be surveying out of a general nervousness that it could lead to being caught.

Pretty amazing, isn’t it. Over 97% of hourly workers make more than the law requires. How can that be? One answer is state minimum wage laws that require payment above the federal minimum wage. Thirty-two states require paying more [7] than $5.15 per hour. That leaves 18 states where it’s legal to pay $5.15 an hour. What is the proportion of workers in those states earn $5.15 or less?

Even in those states [8] without a minimum above $5.15 [8], (scroll down to Table 3), at least 96% of all hourly workers earn more than $5.15. So state minimum wage statutes can’t explain why so many employees earn more than the legal minimum.

So why would greedy employers pay more than the legal minimum?

The answer is simple: competition among employers to attract workers.