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

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Whether the minimum wage should keep up with cost of living depends on what policymakers want the minimum wage to do, but if the goal is to maintain purchasing power, the answer is generally yes - without adjustment, inflation erodes its value.

1. The purpose of linking to cost of living

The original rationale for periodic increases has been in part to keep up with rising prices. Legal and policy interpretations state that to "maintain" employee purchasing power implies a minimum wage that corresponds to the cost of living, rising and falling with increases or decreases in the cost of living.

When the minimum wage is not increased, its real value decreases substantially over time because inflation generally has increased between adjustments. The real value of the federal minimum wage generally rose from 1938 to 1968, after which it has generally fallen in real terms.

As a result:

•The federal minimum wage has been $7.25 since July 2009, the longest period without an increase since 1938, which leaves today's wage floor at its lowest inflation-adjusted value in seven decades.
•The inflation-adjusted peak was in February 1968. The minimum wage would be over $14 in 2024 dollars if its real value had remained at the 1968 level. Other calculations estimate if the $1.60 rate enacted in 1968 had been indexed to the CPI-W at that time, it would be $10.65 per hour.

Proponents argue:

•Local minimum-wage laws can help ensure that workers can afford housing, food, and other basic necessities in locations where the cost of living is higher than in other parts of the country or state.
•An economy works best when working people can afford to participate in it, and workers deserve wages that keep pace with the real cost of living.
•A cost of living adjustment that ensures minimum wage will be adjusted each year to keep up with inflation will ensure that the value of minimum wage will remain constant and wages will not lose value over time.

A related argument is geographic variation: A flat "one size fits all" wage does not consider the enormous local variations in cost of living and taxes. What matters more than the dollar amount is the amount workers have left after paying taxes and what the remainder buys in goods and services. That is why the concept of a "living wage" is often distinguished from a minimum wage - a living wage is defined as the minimum amount needed to enjoy a basic, but socially acceptable standard of living based on cost of living.

2. How indexing works today

The federal minimum wage is not automatically indexed to inflation - it requires an act of Congress to raise it, and has been raised 22 separate times since 1938.

Many states have adopted indexing to avoid repeated legislative battles:

•Of the 30 states and DC with minimum wage rates above the federal rate, 20 states and DC have scheduled increases through a combination of planned increases and current or future year indexation of state minimum wage rates to a measure of inflation.
•Table details show 6 states — Arizona, Montana, Oregon, South Dakota, Vermont, and Virginia — index to the national Consumer Price Index for All Urban Consumers (CPI-U) and 7 states — California, Florida, Michigan, Missouri, New Jersey, Ohio, and Washington — index to the national Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
•Others use different measures: 2 states use a regional version of the CPI-W, 1 state uses the implicit price deflator for Personal Consumption Expenditures (PCE), and 1 state uses the Employment Cost Index (ECI).

Advocates for workers say the wage jumps will help people keep up with the rising cost of living.

3. Arguments against automatic cost-of-living indexing

Opponents and some economists raise concerns:

•Business groups have formally opposed indexing increases in the minimum wage to match the inflation rate.
•Research suggests that indexing minimum wages to inflation – and thereby making them "permanent" – could induce firms to respond very differently to minimum wage increases. If firms think they will have to live with higher and growing minimum wages into the long term, they may be much more willing to adjust their production functions, including their labor forces.
•Other cited potential downsides of higher minimum wages include increased unemployment, shift from full-time to part-time work, inflation in overall wage scales, decreased rates of job growth, and higher demand for labor-reducing technologies.
•There is also debate over which index is appropriate - consumer prices, median wage, GDP, or poverty level - and what base year to lock in, because any index tends to increase over time and locks in past growth.

Bottom line

•If the policy goal is to preserve purchasing power and prevent a full-time worker from falling into poverty, then yes, the minimum wage needs to be adjusted for cost of living, either through regular legislative increases or automatic indexing like many states already do.
•If the policy goal is to minimize potential negative effects on employment, small business costs, or labor market flexibility, then automatic cost-of-living increases are viewed as problematic, and opponents prefer case-by-case legislative decisions.

In practice, the U.S. has moved toward a hybrid system: the federal floor has not kept up with inflation, while most states with higher costs of living have enacted indexing to try to keep the wage's real value constant.

Citations (2)

  1. 1cornell.eduAcademic
    Inflation and the Real Minimum Wage: A Fact Sheet

    Backs: “Whether the minimum wage should keep up with cost of living depends on what policymakers want the minimum wage to do, but if the goal is to maintain purchasing power, the answer is generally yes - without adjustment, inflation erodes its value. 1. The purpose of linking to cost of living”

  2. 2fas.orgNot yet classified
    State Minimum Wages: An Overview

    Backs: “When the minimum wage is not increased, its real value decreases substantially over time because inflation generally has increased between adjustments. The real value of the federal minimum wage generally rose from 1938 to 1968, after which it has generally fallen in real terms.”