Does the minimum wage need to keep up with the cost of living?

Your question touches cost of living, inflation and living wage — I'll search for current data and analysis to answer it.

Whether the minimum wage should keep up with the cost of living depends on the goal of the policy. The debate is about indexing - automatically linking the wage to a cost-of-living measure.

1. What "keeping up" means - indexing to inflation

Generally, indexation is linking one variable's value to changes in another, independent variable (e.g., an average wage, cost of living). In the case of the minimum wage, indexation would mean the minimum wage rate changes when the index (e.g., prices, wages, costs) changes.

Most indices that have been tied to minimum wages at the state level aim to keep pace with consumer prices, most commonly different versions of the Consumer Price Index.

The argument for indexing is that:

> In general, to maintain the relative value of a wage over time, that wage may be indexed to some measure in the economy.

> This mechanism provides for automatic changes in the minimum wage over time as the index changes and does not require legislative action to make periodic adjustments.

Indexing provides regular adjustments to and reduces the volatility of minimum wage rates, maintains the relative value of the minimum wage to other economic indicators (e.g., prices).

Proponents describe it as:
> "Indexing is a popular tool for legislators to make sure that wages, once they are passed, are not eroding due to inflation,"

Advocates for an increase point to the failure of the minimum wage to keep pace with inflation or with average wages in the economy as a whole.

2. What happens if it does NOT keep up

If a minimum wage rate is established as a fixed nominal amount and not increased, its real value will erode over time due to the tendency of prices and wages to increase over time.

The federal example is often cited:

Because $7.25 has not kept up, it falls short of a living wage. Even that inflation-adjusted minimum wage wouldn't be equivalent to a living wage. In Manhattan, it's $17.56 per hour for one adult with no children, ... even in Benson County, North Dakota — one of the lowest cost of living counties — you'd need to make $11.01 an hour.

For this reason, several states, but not the federal government, have attempted to maintain the value of their minimum wage rates by indexing the rate to some measure of inflation. That will be the case in 24 jurisdictions early next year, including Alaska, Florida, Minnesota, Montana, Ohio, South Dakota and Vermont, as well as Seattle and a host of cities in California.

And increasingly, minimum wage hikes also occur automatically through annual indexing based on cost-of-living increases derived from the consumer price index.

Maintaining purchasing power is seen by supporters as ensuring the minimum wage remains a viable floor: it will ensure that the value of minimum wage will remain constant and wages will not lose value over time.

> If the minimum wage rises in step with inflation, we are effectively ensuring that it will allow minimum wage earners to buy the same amount of goods and services through time, protecting them against higher prices.

3. Arguments against automatic cost-of-living indexing

Opponents and some economists argue there are trade-offs:

a) Employment effects become permanent. Because hourly minimums are set in nominal terms rather than being indexed to the general price level, inflation reduces their adverse effects on employment. If indexed, firms may respond to the permanency of minimum wage increases, knowing that those increases won't be eroded over time by price inflation, by changing their production functions to rely less [on labor].

Economist Michael Strain argues that regular minimum wage increases, including to adjust for inflation, can be a problem for employers:

> "Where the minimum wage is $13, $14 or $15 per hour, it's hard to imagine many businesses being able to absorb that cost only through higher prices, higher productivity and reduced turnover," he said. "So they're going to have to turn to the size of their workforce."

b) Potential inflationary spiral. Critics argue:
> forced wage increases produce higher labor costs, which translate into higher product prices, thus a higher CPI results, thereby triggering another increase in minimum wage – this effect is circular and compounding;

and creates additional inflation in the economy.

c) Measurement issues. economist Michael Boskin and his colleagues argue that the CPI suffers from quality and new product bias, as a result the index overstates inflation and increases the cost of living.

d) Oversight and flexibility. Indexation may also reduce regular oversight of minimum wage changes because it automatically adjusts the rate and changes one part of the FLSA while leaving other parts of the act unchanged subject to congressional action. And a single national index cannot account for geographic differences - Giving low-paid workers everywhere in the country the same real purchasing power would require hundreds of different minimum wages, scaled to each locality's cost of living.

e) Alternative policies. Some economists argue indexing to median wages or prices merely perpetuates imbalances and that other tools like the Earned Income Tax Credit may be more targeted.

Bottom line

Most recent Congressional proposals to increase the minimum wage would combine a series of nominal rate increases, followed by indexation to a consumer price index, reflecting a compromise view: raise the level first, then keep it from eroding.