In this article, we want to give you a brief overview of the development of the US federal minimum wage and the number of houses you can buy with it per year. It’s not many as you can probably guess!
Let’s start with the basics. What is the minimum wage and why was it introduced in the first place? As we’re talking about the first place. New Zealand was actually the country in the world, that passed a national minimum wage law back in 1894.
America’s minimum wage was first introduced by Franklin Delano Roosevelt in 1938. It was set at 25c/hour, which is $4 per hour in today’s money (inflation-adjusted).
The reason why a minimum wage was introduced, was to end so-called sweated labor, which had developed in the wake of industrialization. Sweatshops employed huge numbers of women and young workers, paying them what were considered nonliving wages, that did not allow workers to afford the necessaries of life. This kind of work was also associated with long work hours, unsanitary and unsafe work conditions.
As you can see in the graphic the minimum wage started out at around $4. It went all the way up to $11.55 in 1968 – which would have been the best year to buy your house – down to $7.25 in 2018.
We have to point out, that as of January 2018 there are 29 states with a minimum wage higher than the federal minimum. According to Wikipedia: “90% of American minimum wage workers earn more than the federal minimum wage – the effective wage is $11.80 as of May 2019″.
So now that we have explained the minimum wage, let’s talk about buying that house you want! Of course, the price depends on where you buy! If you want to the full math, you can read the following, excellent comment on Reddit by “Barstarzztrucker“:
Most mortgages can be represented by monthly cost per $1000 borrowed. Federal Minimum wage is $7.25/ hr. The average home price today is $200,000. It’s fair to assume someone on minimum wage will be getting an fha loan with only 3.5% down creating a borrowing price of $193,000.
That means the borrower will have to pay 193 × the monthly cost per $1000. Assuming great credit a 15 yr mortgage at 3% will be $6.90 per $1000 or $6.90 out of $7.25 for the first 193 hours worked per month or 48.25 hours per week. Impossible because it ignores payroll deductions so we’ll move on to a 30 year mortgage.
$3040 / year to feed a person
Effective take home pay after overtime and taxes without retirement or healtcare will be roughly $6.33 / hour for 48.25 hours each week. An average priced house with immaculate credit and only a 3% loan on the fha loan above for 30 years will run $4.21 of the $6.33 /hour. That will leave $2.12 / hour, $102.29 / week, or $5,319.08 / year for all expenses besides the mortgage. According to business insider, the average home taxes are $2,279/ year. That leaves $3040 to feed a person for the year. This doesn’t include anything else such as required health insurance, entertainment of any kind, transportation, communication, etc. This also assumes you never get a single day off all year for 30 years. This also doesnt include other things like PMI, homeowners insurance, etc.
30% in 1940 vs. 58% today
In 1940, the average home price was $2938, minimum wage was $0.30. The average mortgage would have been $15 / month. Minimum wage at 40 hours was $12 / week. Working only 40 hours / week and just 50 weeks per year as opposed to 52 above, the mortgage loan cost would be roughly $0.09 /hour.
That’s approximately 30% of total earning in 1940 vs 58% now. This doesn’t account for the much lower interest rate given to the now group or the fact that the 1940 example had 0 down.
It goes to show that the difference between 1940 and now is quite significant. Another issue we want to quickly highlight is the “cost of living” – which has changed even more dramatically.US income is always reported as household gross income. The oldest info we could find was from 1947. The average household income was $31,000 vs $80,000 in 2018. We have to factor in, that most households have been single earners in 1947. In 2018 most households are dual earners. This leaves us with the following numbers:
2018 household gross income $40,000 (80:2). It was $31.000 in 1947, an increase of less than 25%. While the average home price has gone up nearly 6600% and so has everything else.