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

Should a wage floor track living costs? I'll pull current data on inflation, purchasing power, and policy arguments for and against indexing.

If the purpose of a minimum wage is to provide a minimum standard of living, then yes - it needs to keep up with the cost of living. Otherwise it loses its purchasing power over time. Whether it should be automatically tied to inflation, and how high it should be, is where the debate lies.

1. What "cost of living" means

Congress created the minimum wage in 1938 to protect workers, create a minimum standard of living, and stabilize the economy following the Great Depression.

2. Has it kept up? No.

The Fair Labor Standards Act of 1938 established the hourly minimum wage rate at 25 cents for covered workers. Since then, it has been raised 22 separate times, most recently in July 2009, when it was increased to $7.25 an hour.

Because there have been some extended periods between these adjustments while inflation generally has increased, the real value (purchasing power) of the minimum wage has decreased substantially over time.

In constant 2016 dollars, the value of the minimum wage has varied from $3.96 (1948) to $10.98 (1968). Other analyses put the 1968 peak at about $9.63 in today's dollars, meaning workers at the minimum wage today are paid roughly 25 percent less than their counterparts 48 years ago.

Because of that erosion, employees working full-time at minimum wage cannot afford basic necessities, such as food, housing, transportation, childcare, and healthcare in any location across the country. One 2021 policy brief estimated a true living wage that supports a basic standard of living without food and housing insecurity would be between $20 and $26 or more per hour depending on the state, and that it would need to adjust regularly to keep pace with inflation and cost of living increases.

3. Arguments that it should keep up

Proponents argue:

a) Preserve purchasing power: An alternative to periodically amending the FLSA to increase the minimum wage would be to index, or link, the federal minimum wage to another variable so that the minimum wage changes automatically when the other variable changes. Indexing provides regular adjustments to and reduces the volatility of minimum wage rates and maintains the relative value of the minimum wage to other economic indicators like prices.

In 10 states plus D.C., the minimum wage rises annually based on some sort of inflation or cost-of-living index, with the intent of preserving its current purchasing power. Cities and states included the automatic inflation-based increases in their minimum wage laws with an eye toward helping workers keep up with the cost of living even if a future legislature didn't act.

b) Reduce poverty and public assistance: If the wage floor falls behind, more full-time workers need Medicaid and SNAP. Raising the floor to a living wage would reduce that subsidy.

c) Geographic fairness: The $7.25 federal minimum wage is pretty much one-size-fits-all across industries and occupations, but cost of living varies widely. Two states, Oregon and New York, have regional variations built into their statewide laws to account for wide cost-of-living differentials within those states. For example, Oregon has a three-tiered scale for Portland metro, standard, and nonurban counties.

4. Arguments for caution or against automatic indexing

Critics and many economists argue:

a) Employment effects: The chief criticism lodged against minimum wage laws is that they raise labor costs excessively for employers of low-wage workers, and in response these employers could lay off workers. Employers report that when their costs are arbitrarily increased, they become more likely to seek out experienced workers and less likely to take a chance on young workers.

Recent research generally concludes that when the minimum wage is set at a moderate level, the impact on employment is modestly negative and close to zero, in part because at moderate levels, minimum wages account for only a small share of an employer's total costs. But at high levels or during economic downturns, the risk of job loss, reduced hours, or automation grows.

b) Price effects: Research finds that following minimum wage increases, both prices and nominal spending rise modestly, especially for categories like food away from home. That can partly offset the gain for workers and contribute to broader inflation.

c) Loss of 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 unchanged. Opponents also note that a national index doesn't reflect local productivity, median wages, or ability of small businesses to pay.

d) Not the same as a living wage: A cost-of-living adjustment only preserves the current minimum wage's purchasing power — it doesn't necessarily raise it to a living wage. If the starting point is already below a living wage, indexing locks in inadequacy.

5. How the U.S. currently handles it

There is no federal indexing. The federal minimum changes only when Congress amends the FLSA.

Most action has shifted to states and cities. Florida voters, for example, approved Amendment 2, which will gradually raise the state's minimum until it reaches $15 in 2026. Currently 17 states and the District of Columbia index their state minimum wages to some economic measure.

Most proposals in Congress in recent years would combine a series of nominal rate increases, followed by indexation to a consumer price index.

Bottom line

> If society wants the minimum wage to continue to function as Congress originally intended — as a floor that provides a minimum standard of living — then logically its real value needs to be maintained as prices rise.

> If it is not indexed, its value will erode by definition.

The practical question is how to keep up:

Do you want to evaluate this from a moral/livability perspective, an economic/employer impact perspective, or as a policy design question about indexing?