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

Should minimum wage match the cost of living? I'll gather the latest research on inflation, purchasing power, and the trade-offs.

Whether the minimum wage should keep up with the cost of living is a normative and economic policy debate. There is no single expert consensus, but the arguments generally fall into two sides:

1. What "keeping up" means

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. That is, relative to other economic indices that may be increasing, a nominal wage loses value unless it too is adjusted.

2. Arguments That Yes, It Should Keep Up

A. Purchasing power has fallen sharply:

The Fair Labor Standards Act established the hourly minimum wage at 25 cents in 1938, and it has been raised 22 separate times, most recently in July 2009 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 (inflation-adjusted) 2016 dollars, the value of the minimum wage has varied from $3.96 (1948) to $10.98 (1968). Other analyses note:

B. It no longer covers basic needs:

Employees working fulltime at minimum wage cannot afford basic necessities, such as food, housing, transportation, childcare, and healthcare in any location across the country. 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 it would need to adjust regularly to keep pace with inflation and cost of living increases.

Advocates argue that to maintain the relative value to other economic indicators (e.g., prices), indexing provides regular adjustments to and reduces the volatility of minimum wage rates. Many proposals would combine a series of nominal rate increases, followed by indexation to a consumer price index.

In practice, 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, providing automatic changes without legislative action. About eight states where the minimum wage went up simply because there's automatic adjustment built into the law, so each year, however much prices have gone up over the preceding year, the minimum wage is automatically adjusted. Currently, 17 states and the District of Columbia index (or have enacted laws that will in the future) their state minimum wages to some economic measure.

Proponents also argue this reduces poverty and inequality, and that low-wage employers are largely large, profitable corporations that can absorb costs. 92 percent of the top 50 low-wage employers made a profit in 2012, while CEO compensation grew by 1,322 percent from 1978 to 2019 while typical worker compensation grew by just 18 percent.

3. Arguments That Automatic Cost-of-Living Matching Has Trade-offs

A. Potential employment effects:

Critics point to estimates that a boost in the minimum wage could cause 500,000 low-wage workers to lose their job as businesses look to absorb the higher costs. When costs are arbitrarily increased, such as with minimum wage hikes, employers become more likely to seek out experienced workers and less likely to take a chance on young workers. "Raising the cost of labor raises the incentive for employers to find ways to use less labor".

Research on inflation indexing specifically finds that minimum wage increases lead to differential employment effects in states where minimum wages are indexed to inflation. Firms may be responding 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].

B. Regional cost-of-living differences:

A one-size-fits-all minimum wage also ignores the significant differences in the cost of living across the country. In Pueblo, Colo., the cost of living is 17 percent lower than the national average, yet an increase in the federal minimum wage would raise it to the same level in Pueblo as in New York City.

C. Business costs and price pass-through:

Small business owners argue: In order to increase wages money has to come from somewhere, I will be forced to increase my prices as all my cost of goods will go up as well as wages. Raising the minimum wage will also increase inflation and the cost of living. Some argue this is unfair to burden a relatively small segment of the population - small business owners who employ low-skilled workers and the customers who patronize those small businesses.

D. Reduced legislative oversight:

Indexing decouples rate changes from other policy considerations and may reduce regular oversight of minimum wage changes because it automatically adjusts the rate.

4. Common Compromise Approaches

Rather than a simple yes/no on keeping up with a national Consumer Price Index (CPI), many economists and policymakers propose:

In short: If the goal of the minimum wage is to provide a minimum standard of living as originally intended, then by definition it needs to keep up with the cost of that living, otherwise inflation gradually erodes its real value. If the goal is to balance worker income support against employment, business viability, and regional economic differences, then how it keeps up — how much, how fast, and what index is used — becomes the central debate.