Inflation and Minimum Wage

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With my calculus and science classes finished, I have the time and energy to turn my focus back towards economics.  Some recent pieces on minimum wage in the New York Times opinion pages, as well as some other sites I frequent has me thinking about how inflation affects minimum wage and why a static minimum wage is bad news for workers. We’re usually accustomed to thinking about the effect of inflation on a bank account or retirement portfolio.  However, inflation affects everything.  Including minimum wage.  Here is the root of why I am unhappy that the federal minimum wage has been stagnant for such long periods (before the 2007-2009 increases there was a 10 year span where the minimum wage was unchanged, for example):  Unless inflation is 0 in a given year, each year that the minimum wage does not change, inflation reduces wages in real terms.

It is important to discuss this issue in real terms (which means adjusted for inflation).  A dollar in 2013 has a very different value relative to current prices that it did in 1980 or even 1938 (when the federal minimum wage was established) because of inflation.  In order to compare the value of a dollar over time, we need to remove inflation from the picture.  Dollar amounts that have been adjusted to remove inflation are call real (as in real prices, real wages, etc.)

Back to minimum wage.  From 1997 to 2007 the federal minimum wage was $5.15/hour.  Every year from 1997 to 2007 inflation was greater than zero.  Let’s use 1997 as our base year.  In 1997 a minimum wage worker earned $5.15 an hour in real terms.  (The base year in any analysis does not need to be adjusted.)  1997 experienced inflation of 2.3%.  So in 1998, a minimum wage worker earned $5.15 an hour in 1998 dollars.  However, when you adjust for inflation,  that $5.15 is only work $5.06 in 1997 dollars.  By 2006, the year before the minimum wage was raised in the first of 3 consecutive raises, the $5.15 that a minimum wage worker made was worth only $4.14 in 1997 dollars.   This means that every year from 1997 to 2006 the value of a minimum wage worker’s pay was worth less than it was the year before.   In effect, every rise in inflation that is not met by an equal rise in the minimum wage is like a pay cut for minimum wage workers.

In 2009, the last year the minimum wage was raised, minimum wage workers made $7.25 per hour.  Adjusting for inflation back to 1997 dollars, their pay is equal to $5.33.  So in 12 years, minimum wage workers only got a real raise of  $0.18 per hour.  The rest of the money just goes to catching up with inflation since 1997.  This needed to happen.  In 2009, workers finally got ever so slightly ahead of inflation.  However, since 2009 the minimum wage has remained $7.25 while inflation has mostly risen.  In order to stay apace of inflation, a minimum wage worker in 2012 would have needed to make $7.74 per hour to truly be equal to their 2009 counterparts.

Minimum wage should be higher than it is in my eyes.  If an adult works full-time at minimum wage, they should be able to meet their basic needs with their wages.  This does not happen in most parts of the country.  The Economic Policy Institute estimates that in any area of the country, the absolute minimum a family needs, regardless of size, to meet its basic needs is twice the federal poverty level.  In 2013, in the lower 48 states and DC, a family of 2 (assume 2 adults with no children) reached the poverty level at $15,510.  A family of 3 requires $19, 530, and a family of 4 requires $23,550.  Let’s take that family of 4.  As per EPI calculations, they would need at least $47,100 to get by.  But 2 adults working 40 hours per week at minimum wage (for a total of 80 hours per week) will earn $30,160 not accounting for taxes or tax credits.  An almost $17,000 shortfall.

This isn’t even comprehensive.  In some places, such as my native NJ, cost of living is higher and a family of 3 or more will need over $65,000 regardless of where in the state they live to pay for their basic expenses.  But taking that $47,100 as manageable, minimum wage (again, not accounting for taxes or tax breaks) need to be about $11.32 for that family of 4 earn it.  And of course that assumes that those two adults work 80 hours every week, no holidays, no sick days, no missed work at all.  (In NJ, to meet that 65,000 minimum the minimum wage would need to be about $15.63.)

Ideally what I would like to see is the minimum wage raised in increments over time to about $15/hour.  Once we reach that $15/hour, minimum wage should be updated annually to keep pace with inflation.  (In the event of negative inflation, wages would stay the same.)  Such an update is often called COLA, or a cost of living allowance.  Since the actual inflation rate isn’t known real-time (real-time figures using current information are usually estimates), a good baseline for COLA would be whatever the Fed’s target inflation rate is (currently 2%).

$15/hour does not cure all problems.  A single parent of multiple children, for example, faces largely the same cost of living as a two-parent household but can only work half the hours.  (Of course, extra work may be an option.)  This means that there is still a role for safety net and welfare programs.  But in general, my goal is to see any person working full-time be able to meet their basic needs such as housing, food, clothing, medical care, travel expenses, and child care (if needed).  To do that, the minimum wage needs to be substantially higher than it is.

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