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.
Will there be inflation if the minimum wage is raised?
Raising the minimum wage, in theory, forces business owners to raise the pricing of their goods or services, causing inflation. A higher minimum wage can be countered by increased worker productivity or a reduction in a company’s workforce.
Inflation-adjusted minimum wage: what should it be?
Consumer prices rose 5.3 percent in August compared to the previous year, causing some anxiety as the economy recovers from the pandemic. Food prices at home increased by 3%, while food prices away from home (i.e. restaurants) increased by 4.7 percent, according to the Bureau of Labor Statistics’ latest release this week. Rents and energy prices both increased by roughly 9%.
One point of worry for employers and employees in the United States is that activists frequently exploit inflation data to support their campaign for a $15 minimum wage, or even a higher salary of $23 per hour, despite the fact that study shows such steep rises will destroy millions of jobs.
Remember, if we kept up with inflation, the minimum wage would be $23/hr right now. $15 is a good middle ground. #RaiseTheWagehttps://t.co/44l6Rqln0F
Despite the fact that inflation has risen dramatically in the last year, the so-called “The Fight for $15” is still not based on a consumer price index. If the 2009 federal minimum wage increase to $7.25 per hour were indexed to climb with inflation, it would equal $9.22 today, according to Bureau of Labor Statistics data up to August 2021.
If the minimum wage were to be adjusted to the level in 1990, it would be $7.17 now. No matter how you slice it, these data don’t even come close to, let alone support, the $23 hourly rate proposed by the union-backed One Fair Wage.
Indeed, the $15 minimum wage goal that many states and municipalities have already adopted has no precedent in history. An organizing director for the Service Employees International Union’s Fight for $15 campaign joked about the absence of genuine analysis informing their main policy goal at one meeting, saying: “We decided that $10 was too low and $20 was too much, so we settled on $15.”
Unfortunately, these draconian minimum wage targets, which lack economic justification, will wreak havoc on firms and employees as they try to recover from the pandemic. According to the impartial Congressional Budget Office, the Raise the Wage Act of 2021, which proposes a $15 minimum wage nationwide, may cost the country up to 2.7 million jobs. According to economists from Miami and Trinity Universities’ industry and state-level analyses, the hospitality and restaurant industries would bear the brunt of these effects. Increases above the $15 minimum wage would have an even bigger negative impact on employer costs, and could result in the loss of many more employment.
Is it necessary to link the minimum wage to inflation?
The indexing of the minimum wage has been criticized because it results in excessively high or low minimum wage levels. The following are some of the arguments:
- If the minimum wage is indexing from a low level, it will remain low, undervaluing work and leaving low-paid workers unable to support themselves and their family.
- Price-based indexing will result in a runaway minimum wage during periods of economic depression or high inflation, causing economic hardship.
Will big, needed increases become politically harder to acquire in the future if indexing is implemented at a time when the minimum wage is at an all-time low? It’s vital to keep in mind that indexing a minimum wage doesn’t raise it in relation to prices or average wages; rather, it freezes it in place. If the minimum wage is $6.00 per hour and prices increase by 3%, the price-indexed minimum wage will increase by 3% to $6.18 per hour. That $6.18, on the other hand, would buy almost the same amount as $6.00 the previous year. As a result, the minimum wage has remained unchanged in terms of purchasing power and quality of life. If the minimum wage is set too low from the outset, indexing will keep its limited purchasing power and may prevent necessary increases.
This criticism is based on a view of minimum wage politics rather than a basic aspect of indexing. The danger is that once indexing is in place, future proposals for hikes will lose political traction. If that’s the case, indexing from a low point will effectively lock in the minimum wage at that level. At this moment, determining the validity of this worry is challenging. States that have indexed minimum wages for inflation so far have either started with relatively high minimum wage levels or have only recently begun indexing.
Price-based indexing, opponents argue, will cause the minimum wage to rise to unreasonable levels in times of economic crisis or high inflation, resulting in job losses and further driving up inflation. This anxiety stems from two sources. The first is that during a period of strong inflation, a minimum wage indexed to inflation would increase at an excessively quick rate in nominal terms. Second, average pay growth can lag price rises during a slump. A minimum wage that rises far faster than other wages could skew labor markets, making it more difficult for firms to hire low-paid workers.
However, increases in the minimum wage owing to price indexing are minor in comparison to increases achieved by legislation. With the exception of one, highly uncommon era detailed below, inflation rarely reaches 5% per year; in the last 20 years, it has only topped 4% once (4.1 percent in 1998). Given that recessions seldom last more than a year and rarely coincide with the effective date of an indexed hike, the overlap between a higher minimum wage and a period of recession is unlikely to be significant (and, as explained below, indexing will not lead to excessive minimum wages leading into recessions). A 5% raise from the existing $5.15 per hour wage would bring it to $5.40 per hour (which would still be its lowest real value in 50 years). The national wage bill would be increased by less than 1/100th of a percent as a result of this increase. As a result, indexing will often result in only a single, small, nominal minimum wage hike during a recession, which will only be effective for a fraction of the recession period.
Furthermore, this is not a novel phenomenon: the present federal minimum wage adjustment scheme also results in rises during recession years. The federal minimum wage was established during the Great Depression, and it was raised twice before the war’s end, in part to keep wages stable in the face of high unemployment. Since then, four hikes have taken effect during recessions, and four more have taken effect in the years preceding or following recessions. As a result, rises during periods of economic weakness have not been regarded as economically harmful in the past.
Comparing minimum wage growth to average salary growth is one way to determine whether it is excessive. The labor market may be distorted if the minimum wage grows consistently and significantly faster than average pay. This, however, does not appear to be a problem when it comes to indexing. During periods of high inflation or economic sluggishness, an indexed minimum wage may grow faster than average earnings, but in most other cases, it will lag behind average pay growth. As previously stated, if the minimum wage had been linked to the CPI-U over the last 50 years, its nominal dollar value would have climbed by 740 percent. In nominal terms, average wages increased by 922 percent over the same 50 years.
Figure C depicts the change in the nominal average pay versus the change in the minimum wage in 1956 if the minimum wage was index to the CPI-U. In this scenario, the minimum wage would have gained ground on the average salary on occasion, but never significantly. The lag in the more normal years avoids indexing for prices from causing the minimum wage to reach excessive levels during times when the economy was performing poorly or inflation was strong. One reason for this is that average earnings grow quicker during years of high inflation than during periods of low inflation, thus a minimum wage adjusted for inflation may not gain much ground against average wages. Consider the ten years from 1973 to 1982, which saw the highest inflation rate in 50 years. Prices increased by 5.8% to 13.5 percent per year, although eight of those ten years also had nominal average salary increases in the top ten. Average wages increased by at least 5.8% in each of six years, and wage growth outpaced inflation in three of them.
Prices often rise across the board during periods of strong inflation. Wages rise more quickly, businesses’ input costs rise, and the prices they charge and the revenue they receive rise. The cost of indexing low-wage employees’ earnings is a minor factor in this equation. Minimum wage workers, unlike the rest of the workforce, should not be denied wage increases during periods of high inflation. They are the workers who most need their wages to stay up with inflation.
Washington, Oregon, Vermont, and Florida are the four states that presently use the CPI to index their minimum wages to prices, and wages in these states have maintained their purchasing power for hundreds of thousands of workers without ill repercussions. During the most recent recession, Washington indexed its minimum wage with no negative consequences; during that time, low-pay sectors of the economy that are affected by the minimum wage actually outperformed higher-income sectors. 3 Annual inflation adjustments haven’t generated inflation in Washington or Oregon (the two states with the longest history of indexing). 4 Since the states began raising their minimum salaries, the BLS price indices for locations within Washington and Oregon have actually decreased in comparison to the national inflation rate. 5
It’s unsurprising that in the states where it’s been attempted, the minimum wage hasn’t spurred inflation. Although the minimum wage is important as a symbol of dedication to the value of work and as a source of assistance for low-wage workers, there are simply not enough low-wage workers with sufficient aggregate income to have a significant impact on overall prices. A 41 percent increase in the national minimum wage from $5.15 to $7.25far more than any increase that would result from indexingwould only raise the country’s total labor costs by 0.22 percent, far too little to cause noticeable inflation in the context of an economy that is constantly adjusting wages and prices on much larger scales.
Does inflation cause pay increases?
According to a study released by the Labor Department on Friday, worker compensation climbed by almost 4% in a year, the quickest rate in two decades. As a result, there has been widespread concern that the United States is on the verge of a major crisis “The “wage-price spiral” occurs when higher wages push up prices, which in turn leads to demands for further higher wages, and so on. The wage-price spiral, on the other hand, is a misleading and outmoded economic concept that refuses to die and continues to generate terrible policies.
Wages do not rise with inflation; instead, they fall as increased prices eat away at paychecks. The dollar amounts on paychecks will increase, but not quickly enough to keep up with inflation. The news of salary hikes came just days after the government disclosed that prices had risen by 7% in the previous year. A more appropriate headline for last Friday’s coverage of Labor’s report would have been “Real Wages Fall by 3%.”
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.
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.
What are the advantages of increasing the minimum wage?
Legislators submitted the “Raise the Wage Act of 2021” in January 2021, with the goal of raising the federal minimum wage from $7.25 per hour to $15 per hour by 2025. It would be the first hike in more than a decade, and the longest since 1938, if passed.
Many state and local governments have already established a $15 minimum wage, while the federal minimum wage has stayed unchanged. (In 2014, for example, Seattle mandated that employers gradually raise their minimum wage until it hits $15 per hour.) Seattle’s minimum wage will be $16.69 per hour in 2021.) Nonetheless, such a huge change at the federal level will undoubtedly be controversial and hotly disputed.
Advantages
Raising the federal minimum wage to $15 per hour would help low-income people improve their overall level of life. These workers would be able to cover their monthly expenses more readily, such as rent, car payments, and other household costs. “Today, a full-time worker cannot afford a basic, two-bedroom apartment in any county in the United States,” said Representative Robert Scott, leader of the House Committee on Education and Labor. Senator Bernie Sanders has also stated that the minimum wage should be $15, as he feels that full-time workers should not be forced to live in poverty.
A second, less visible benefit of hiking the minimum wage has been proposed: improved staff morale. Not only will happier employees make for a more cohesive and effective workforce, but they may also increase customer satisfaction. Furthermore, if employees are happy with their jobs and compensation, they are less likely to leave, which saves the company money on hiring and training.
Proponents say that raising the minimum wage to $15 will assist women and minorities. A $15 minimum wage would improve the pay of 31% of African Americans and 26% of Latinos. Furthermore, a disproportionate number of minority workers live in one of the 21 states with a $7.25-per-hour minimum wage.
Disadvantages
Small firms, according to opponents of raising the minimum wage, would suffer as a result of such a significant increase. An rise in the federal minimum wage will dramatically increase small businesses’ operating costs and tighten profits, just as they are beginning to recover from the international Covid-19 outbreak.
Raising the minimum wage to $15 would also boost daycare expenditures by 21% on average in the United States. In 2019, the average hourly wage for an early childcare worker in the United States was $11.65. As a result, a nationally enforced $15 minimum wage would nearly triple the cost of labor for childcare providers.
Advocates on both sides will continue to cite several reasons in favor of their viewpoints as the federal minimum wage debate continues to elicit passionate opinions. Those who oppose a minimum wage claim that market forces should be in charge. If there is a lot of competition for talented personnel, a business may have little choice but to raise salaries to keep staff. Employers and employees should be aware of both sides of the issue and prepare for a change in the federal minimum wage law that is almost certain to occur.
(This article was greatly aided by Logan Adams, a spring clerk in our Dallas office.)
Is the United Kingdom’s minimum wage linked to inflation?
Since their inception in the United Kingdom, the national minimum and living wages have risen every year. However, this does not imply that they have kept up with rising living costs.
Chancellor Rishi Sunak announced an increase in the national living and minimum wages in his Autumn Budget, declaring that the higher rates “guarantee we’re making work pay and maintains us on track to reach our commitment to abolish low pay by the end of this Parliament.”
Every country in the globe has its own system for determining the minimum wage, as well as the amounts that should be paid to different age groups.
Some countries have a minimum pay per hour, whereas others have a minimum wage per working day, week, or month. Many countries still do not have any kind of minimum wage at all.
In general, the national minimum wage in this country rises by roughly 4% per year, in accordance with inflation rates. If the minimum wage does not keep pace with inflation, people will grow poorer despite earning the same amount of money.
Naturally, different countries have varying living costs, inflation rates, and average wages. But, in the broader scheme of things, how does the United Kingdom fare? And who has the world’s highest minimum wage?
Is it necessary to raise the minimum wage?
Raising the federal minimum wage will boost consumer spending, boost company profits, and help the economy expand. A little increase would boost worker productivity while also lowering turnover and absenteeism. It would also help the economy as a whole by increasing consumer demand.