Correction: The original item on January 21, 2020 stated that the hourly wage was $24. On March 16, 2022, a spreadsheet error was discovered and repaired. The data in this page have been revised throughout. For a complete explanation, see Dean Baker’s post.
Until 1968, the minimum wage not only kept pace with inflation, but it also grew in lockstep with productivity. The argument is simple: we anticipate that salaries will rise in lockstep with productivity growth. The minimum wage should rise in tandem with productivity in order for low-paid workers to benefit from the overall improvement in society’s living standards.
It’s crucial to understand the difference between inflation and productivity. If the minimum wage advances in lockstep with inflation, we can be sure that minimum wage people will be able to buy the same quantity of goods and services over time, insulating them from rising prices. If it rises with productivity, however, it means that minimum wage earners will be able to buy more goods and services over time as employees are able to generate more products and services per hour.
While the national minimum wage rose nearly in lockstep with productivity growth from 1938 to 1968, it has not kept up with inflation in the more than five decades since then. If the minimum wage had risen in lockstep with productivity growth since 1968, it would now be about $21.50 an hour, as illustrated in the graph below.
Does the minimum wage increase in line with inflation?
- With current moves to raise the federal minimum wage to $15 per hour, raising the minimum wage has been an issue for decades.
- There are differing perspectives on whether increasing the minimum wage causes inflation.
- According to some economists, boosting the minimum wage artificially causes labor market imbalances and contributes to inflation.
- Other economists point out that in the past, when minimum wages were raised, inflation did not follow.
To keep up with inflation, how much need wages rise?
Work has gotten worse for many since the outbreak of the epidemic, further aggravating the issue. Due to the high incidence of employees abandoning their jobs, a smaller number of people are shouldering the workload that was formerly carried by a larger number of workers, adding to significant burnout rates. Not to mention the additional hazards posed by the pandemic itself, which include creating more hazardous work situations and adding more labor such as ensuring consumers are wearing masks.
“No one thinks when they sign up to be a cashier that that job will be deadly,” Molly Kinder, a Brookings fellow and the report’s author, told Recode, referring to the dangers that people working in front-line positions at places like grocery stores or pharmacies face if they become infected with the virus. According to Kinder, one Kroger employee she’s been interviewing isn’t sure if a raise will be enough to compensate for the increased stress.
“She’s been harping on the importance of a $15 minimum wage. “Is that additional tiny bit of money worth it when my mental health is suffering, it’s so unsafe, and I’m spending more at the pump?” she asks when she finally understands.
Inflationary pressures on salaries are projected to endure through 2022. According to a new poll of more than 5,000 employers across industries by compensation software business Payscale, 85 percent of employers are concerned that projected salary increases this year, which are already significantly greater than in recent years, will be undermined by inflation.
Fortunately for you, we’re in a once-in-a-generation historical moment where inflation is predicted to decline but labor shortages are not.
“According to David Smith, an economics professor at Pepperdine’s business school, “workers have more bargaining power, which can be a countervailing force to some of the difficulties we’re having,” such as income disparity. “In the long run, that would be beneficial.”
For the time being, those gains are required to keep up with the rising cost of commodities. However, if the price of products moderates, these long-overdue pay increases may have some real-world impact for Americans.
What employers are going to have to do about it
Employers suffer from inflation because they must spend more to keep their employees from looking for greater pay elsewhere. Employers may need to raise wages in line with inflation, provide better perks, or change how they operate in order to retain those workers.
The most basic solution is to raise salaries. In the six years that Payscale has been collecting this data, 44 percent of firms say they plan to provide average raises of 3% or more this year. Fewer than 10% are increasing pay by more than 5%, which is more in line with inflation.
“There are certain companies who simply go out there and say, ‘We have enough wealth, and we can go out and be dominant in salary as a differentiator,'” says one employer. Payscale’s chief people officer, Shelly Holt, stated. “When you look at a middle or smaller company, they might not have the luxury.”
To recruit and keep employees, these businesses will have to rely more heavily on other forms of benefits. This might entail, among other things, greater health care coverage, increased vacation time, and remote job choices. That corresponds to some of the insights gained during the Great Resignation.
“Employees want more than just a good salary. Pay is important, but employees also desire workplace flexibility and the opportunity to live better lives, which is changing how they think about perks and total rewards, according to Holt.
Companies are offering a greater choice of perks this year than they were pre-pandemic, according to Payscale. Prior to the pandemic, only 40% of the organizations polled offered remote work choices; now, 65% do. This year, the number of companies offering mental health and wellness programs increased by 7% to 65 percent. There were also modest increases in the number of businesses that provide four-day workweeks and child care subsidies.
According to Allie Kelly, chief marketing officer of recruiting platform Jobvite, the things that might help set firms apart require a shift in perspective, from treating employees like labor to treating them like people. This necessitates a constant reevaluation of offers in order to keep up with what’s vital to their employees.
“People have various perceptions and understandings of their own self-worth and what matters to them in life. Money is important, but it isn’t enough,” Kelly said, listing perks such as child care, shorter workdays, and more professional growth, as well as lower benefits and income.
While many of these perks may be less expensive than a 7.9% annual raise, they are not free. Companies must decide whether they can or should pass on those expenses to customers, which could worsen inflation, or whether they can simply swallow them as a cost of doing business. According to Erica Groshen, senior economics advisor at Cornell University’s labor school, this could entail opening for fewer hours, producing less overall, or cutting profit margins.
“Right now, and for a long time, we have historically high profit margins,” Groshen remarked. “As a result, it would not be considered a crisis in the past.”
The rising expense of human work is also hastening the transition from wage labor to automation, as has been predicted for some time. Robots, while expensive, do not demand more money and do not become ill during a pandemic.
Employers will replace people with robots to the extent that they can, according to Shivaram Rajgopal, a professor at Columbia University’s business school.
“Now you use a QR code to find the menu,” Rajgopal explained. “The next step is to simply place the order, and it will be delivered to the kitchen. We don’t require as many people to serve us.”
However, for those of us who haven’t yet been replaced by robots, the current employment scenario may work in our favor. That’s because, while inflation is expected to reduce, the demographics that are causing the labor shortage an entire generation of baby boomers retiring aren’t likely to change.
“I don’t think the power will suddenly shift back to employers,” said Kinder of the Brookings Institution. “If inflation moderates, some of these demand-and-supply difficulties moderate, and workers retain some negotiating leverage, that would be a good conclusion.”
To put it another way, your next increase may feel a lot better if you’re not spending as much for everything else, but we don’t know when high inflation will end.
This item has been updated with new inflation and wage data from the Bureau of Labor Statistics as of March 10, 2022.
Do rising salaries lead to inflation?
Is Wage Inflation a Common Cause of Inflation? Since its inception, research has disproved wage-push inflation’s hypothesized function as a source of inflation. Higher wages do not lead to higher prices or inflation; rather, higher prices lead to higher incomes.
Why is inflation so detrimental to the economy?
- Inflation, or the gradual increase in the price of goods and services over time, has a variety of positive and negative consequences.
- Inflation reduces purchasing power, or the amount of something that can be bought with money.
- Because inflation reduces the purchasing power of currency, customers are encouraged to spend and store up on products that depreciate more slowly.
To keep up with inflation in 2022, how much of a raise do I need?
In 2022, 44% of companies intend to grant salary raises of more than 3%. Inflation was 7.5 percent higher in January 2022 than it was a year earlier, a 40-year high.
What steps are employers taking to combat inflation?
The latter element, in particular, led to one significant adjustment for the year: a 10% reduction in employee healthcare rates in 2022, with no change in benefit levels.
“People are continually whining about the high cost of healthcare. “What our employees told us was that they wanted more money in their pockets,” Darren Burton, the company’s chief people officer, said. “The response has been overwhelming.”
KPMG isn’t the only firm concerned about and responding to growing inflation rates. According to the Consumer Price Index, the annual rate of inflation in the United States reached 6.8% in November 2021, the highest in more than three decades. Businesses areand should bethinking about how they can help, says Stephanie Naznitsky, an executive director with human resource consulting firm Robert Half. With those large hikes hitting employees in all aspects of life, employers areand should bethinking about how they can help. That urgency is amplified in today’s hot job market, where a large number of people are willing to leave their existing jobs in exchange for higher income and better benefits that can help with mounting costs.
“Rising living costs are affecting the entire workforce,” she explains. “This is something that employers should address.”
According to Naznitsky, rising inflation rates, among other problems brought on by the epidemic, have caused workers to re-evaluate their current status. “We’re currently in a candidate-driven market. There are more job opportunities than qualified applicants. Workers are aware that, as the cost of living rises, they can seek out alternative chances to improve their circumstances and balance some of the personal living expenses that have risen in recent months.”
When it comes to dealing with rising inflation rates, many companies are turning to a tried-and-true strategy: pay improvements, such as bonuses and salary hikes. According to a recent XpertHR survey, the typical percentage change for overall compensation budgets from 2021 to 2022 is 3%.
According to the Conference Board, companies are putting away an average of 3.9 percent of total payroll for salary hikes next year, the highest level since 2008. Despite the fact that these raises are bigger than in recent years, clever companies will almost certainly go even higher.
“Forward-thinking organizations who wish to overcome the labor scarcity should consider increasing their expected salary budgets by more than 3%, or look into how benefits other than pay can contribute to a great employee experience,” says Andrew Hellwege, XpertHR’s surveys editor.
According to Julie Stich, vice president of content for the International Foundation of Employee Benefit Plans, a nonpartisan organization with more than 8,200 organizations and 32,000 individuals as members, reexamining employee healthcare costs, as KPMG did, is one way employers often address rising inflation. With the latest inflation figureson top of pandemic concerns that are causing staffing issues and supply chain issues, which are projected to drive up healthcare coststhis is a hot topic this year.
“Employers should discuss whether or not to pass on anticipated healthcare expense hikes to their employees,” she says. “In this tight job market, employers may be hesitant to expand cost-sharing.”
To deal with mounting costs, an increasing number of companies are attempting to get creative with their benefit offerings. Employers may choose to invest in perks such as student debt assistance, daycare subsidies, or fertility benefitsservices that directly benefit an employee’s wallet. According to Stich, these investments frequently pay off for businesses.
“She emphasizes that “the benefits of attracting and maintaining essential individuals can quickly surpass any utilization costs.” “The significance of communication, as always, cannot be overstated. Employers must emphasize the importance of the advantages they provide to their workers.”
Employees can be more in control of moving away from expensive locations, for example, or cutting down on traveling to save on petrol or other transportation expenses, thanks to flexibility and remote work, according to Naznitsky.
“If you can assist in those areas, you may be able to save your employees from a difficult commute and commuting expenditures, or you may be able to provide discounts to help with other expenses,” she says. “Ultimately, the discussion revolves around starting salaries and sign-on bonuses, but we’ve seen employers get inventive in order to assist their employees and keep top talent.”
“Retention is critical, and if businesses don’t keep up with rising costs by altering compensation or bonus structures, they risk losing top people,” says Naznitsky. “Finding talent to add to your team is difficult in today’s industry. You don’t want to be in a scenario where employee turnover is harming morale and you have to replace talent on top of that.”
Is a 3% rise sufficient?
An annual pay raise of 3% may not seem like much, especially in light of recent events in the world. But it’s better than nothing in today’s environment. Remember that little increments add up over time and can culminate in a very high pay.
Is everyone getting a raise in 2022 when the minimum wage rises?
An economy that works for everyone is necessary for progress and the well-being of working families.
President Biden signed the Minimum Wage Executive Order on April 27, 2021, and the Department of Labor’s Wage and Hour Division issued the implementing regulations, ensuring that workers on federal contracts are paid a fair wage and demonstrating that the government can lead by example.
We’re boosting the minimum pay for government contract workers to $15.00 per hour beginning January 30, 2022. This rise, which will effect more than 300,000 workers, comes at a time when the federal government is making historic investments in our nation’s infrastructure, which will result in the creation of millions of new jobs in construction and associated industries.
While construction employees will be covered by the $15 minimum wage, workers in child care, health care, and building and other services on government contracts will also be covered. Women make up around 54% of those affected by the minimum wage rise, while workers of color make up roughly 25%. Workers who benefit from our final minimum wage rule will receive an average annual rise of $5,228.
Raising the minimum wage strengthens families’ financial security, decreases poverty, and moves the country closer to reversing decades of income inequality. Better government services, increased morale and productivity, and fewer turnover and absenteeism are all possible additional benefits.
The rule also protects workers on government contracts, in addition to raising the minimum wage:
- Raising the minimum pay for disabled workers who would otherwise earn less than the minimum wage.
- Starting Jan. 1, 2023, federal contract workers who get tips will be paid at least 85 percent of the entire minimum wage in cash, and 100 percent starting Jan. 1, 2024.
- Workers who provide recreational activities on public lands should have their minimum wage rights restored.
As of January 30, 2021, these modifications will apply to most new contracts, including renewals and extensions. They apply to federal contract workers in all 50 states, as well as the District of Columbia, Puerto Rico, the Virgin Islands, Outer Continental Shelf lands as defined in the Outer Continental Shelf Lands Act, American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Wake Island, and Johnston Island, as well as the District of Columbia.
As a government employee, I witness firsthand how the labor of federal contract workers keeps the government functioning and ensures that the American people have access to critical services and resources. Executive Order 14026, which I am happy to sign, will help hundreds of thousands of hardworking people, their families, and our communities.
Would you like to understand more about this rule and what it implications for businesses? On the 26th and 27th of January, register for one of our federal contractor seminars.
Why should the minimum wage be increased?
What impact would raising the minimum wage have on employment? The cost of employing low-paid workers would rise if the minimum wage was raised. As a result, some firms would hire fewer people than they would if the minimum wage were lower. However, employment may increase for specific workers or in certain conditions.
The amount of jobless, not merely unemployed, workers would reflect changes in employment. People who are jobless include both those who have left the labor force (for example, because they believe there are no jobs available for them) and those who are looking for work.
How did the CBO calculate the employment effects? The amount of the effects, according to the CBO, is determined by the number of workers affected by the rise in the minimum wage, wage changes caused by the higher minimum wage, and the responsiveness of employment to those salary changes. If the minimum wage change affected more workers, if it resulted in larger mandated increases for directly affected workers, if firms had more time to respond (for example, because the change was phased in over a longer period), and if the minimum wage was indexed to inflation or wage growth, the effects would be greater in general.
See Appendix A of the CBO’s July 2019 report The Effects on Employment and Family Income of Increasing the Federal Minimum Wage for more information on the CBO’s analysis. Despite the fact that the 2020 coronavirus pandemic and the current recession had an impact on CBO’s baseline budget and economic projections for the years 20212030, CBO has not changed its methods for estimating how employment would respond to a higher minimum wage, in part because CBO expects employment to be near the level it was in the baseline projections underlying the 2019 report in a few years.
How long would people remain jobless if they lost their jobs as a result of a minimum-wage increase? At one extreme, a raise in the minimum wage might permanently lay off a tiny group of workers, preventing them from benefiting from increased pay. On the other hand, a big group of workers may bounce in and out of work on a regular basis, going unemployed for brief periods of time yet earning greater income during the weeks they were worked.
CBO used its estimates of the distribution of unemployment durations for the 20002020 period to assign directly affected workers either no joblessness or a duration of joblessness within the projection year that was randomly chosen from that distribution in analyzing the effects of joblessness on poverty. As a result, some workers in CBO’s analysis are unemployed for over a year, while others are unemployed for significantly shorter lengths of time.
What impact would raising the minimum wage have on family income? A higher minimum wage would increase the real income of low-wage employees who already have jobs, pulling some of those families out of poverty. However, some families’ incomes would suffer as a result of other workers being laid off and business owners having to bear at least some of the higher labor costs. As a result, raising the minimum wage would result in a net decrease in average family income.
What method did the CBO use to calculate the effects on family income? The CBO forecasted future family income distributions and then blended those projections with estimates of wage rates, employment, company income, and prices. Increases in the earnings of individuals who would have earned slightly more than the proposed minimum wage if the policy had not been implemented include increases in the wages of workers who would have earned slightly more than the proposed minimum wage if the policy had not been implemented. Losses in business owners’ income and consumer purchasing power would be somewhat compensated by an improvement in worker productivity as a result of higher pay. (This boost in production could come from a variety of sources, including a decrease in turnover.) See The Effects of Raising the Federal Minimum Wage on Employment and Family Income for further information.)
What impact would raising the minimum wage have on the number of individuals living in poverty? A higher minimum wage would elevate some families’ income beyond the poverty line and so reduce the number of people in poverty by increasing the income of low-paid workers with jobs. Low-wage workers who lose their jobs, on the other hand, will see their earnings plummet, and in certain situations, their family’s income will fall below the poverty line. The first effect would be stronger than the second, resulting in a decrease in the number of individuals living in poverty.
How did the CBO calculate the number of persons living in poverty? The CBO estimated the distribution of poverty in future years using the same methodology it used to project the distribution of family income, using the same definitions of income and poverty criteria as the Census Bureau. According to the CBO, the poverty line will be $21,260 for a family of three and $26,850 for a family of four in 2025 (in 2021 dollars).
What is the probability of these outcomes? The magnitude of any option’s effects on employment and family income is highly unknown. There are two primary causes for this. First, future wage increase is questionable under existing law. If wages grow faster than the CBO predicts, wages will be higher in future years than the CBO predicts, and increases in the federal minimum wage will have a lower impact. The effects would be greater if wages grew more slowly than the CBO predicted.
Second, there is a lot of ambiguity regarding whether or not a raise in the minimum wage will affect employment. Increases in the minimum wage would result in bigger job losses if employment is more responsive than the CBO predicts. If employment is less responsive than the CBO predicts, however, the decreases will be less. The study literature on how changes in the federal minimum wage effect employment reveals a wide range of results. Many studies have found little or no effect, whereas others have discovered significant job losses.
Is it possible that raising the minimum wage will have unintended consequences? Studies have looked at the relationship between minimum wages and a variety of outcomes other than employment and family income, such as labor force participation (whether a person is working or actively looking for work), health outcomes like depression, suicide, and obesity, education outcomes like school completion and job training, and social outcomes like crime. In this research, CBO did not go into the other possible outcomes. However, Appendix B of The Effects on Employment and Family Income of Increasing the Federal Minimum Wage contains a list of sources.
The CBO calculated how a $15 minimum wage option would effect the federal budget in The Budgetary Effects of the Raise the Wage Act of 2021. Changes in macroeconomic factors like inflation and aggregate income were factored into the analysis.
How have the estimations generated by this tool altered as a result of the updates? The current version of the tool produces different results than the first version released in 2019. This is due to two factors. To begin, the alternatives would be introduced in 2022 rather than 2020, though they would be fully implemented on January 1st, 2025, 2026, or 2027, as in the previous version. Under existing law, earnings would grow over time, so any increase in the minimum wage would have a smaller impact on wages, and thus on employment and family income, if it occurred later. Second, because changes in mean salaries are the most important contributor to budgetary effect estimations, the tool now displays mean (rather than median) estimates from distributions of anticipated outcomes. The means are often greater than the medians because those distributions include some really large values. See The Budgetary Effects of the Raise the Wage Act of 2021 for a more in-depth look at these changes.
The CBO also changed the size of incremental changes to the minimum wage leading up to the policy’s target minimum wage. The overall increase in the minimum wage was allocated evenly across the years of a policy’s implementation in the original version of the tool. Annual minimum wage increases are equivalent to those imposed by the Raise the Wage Act of 2021 in the updated edition. As a result, the biggest gains occur in the first year after a policy is implemented.
How does the Raise the Wage Act vary from the default policy option? This interactive’s default option closely resembles the Raise the Wage Act of 2021, which the CBO analyzed in its February 2021 report. The standard minimum, for example, reaches $15 per hour four years after the first incremental increase, the subminimum for tipped workers reaches parity with the regular minimum two years after the regular minimum reaches $15, and both minimums are indexed to changes in median hourly wages once they reach their targets. The key difference is that the first incremental rise occurs on January 1, 2022 in this interactive, whereas it was anticipated for June 1, 2021 in the February 2021 report.
What is creating 2021 inflation?
As fractured supply chains combined with increased consumer demand for secondhand vehicles and construction materials, 2021 saw the fastest annual price rise since the early 1980s.