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

Your question touches a classic economic and equity debate — I'll gather current data on how the minimum wage tracks the cost of living.

Whether the minimum wage should keep up with the cost of living depends on what you think the minimum wage is for — but by most measures it currently does not.

1. What "keeping up" means

One reason that the federal minimum wage provokes continuing controversy is that it doesn’t automatically adjust to the rising cost of living. This means it is completely dependent upon political negotiations, and its real value falls when prices rise between increases.

2. Why supporters say Yes — it needs to keep up

a) Purchasing power has eroded. The purchasing power of minimum wage reached its peak in 1968 and steadily declined since. In 1968 the federal minimum wage peaked in purchasing power at $1.60 per hour, the equivalent of $11.53 in 2019 dollars.

If it had kept up with inflation from that point it would have reached at least $10.45 in 2019. Other calculations put it higher: Today’s minimum wage would be $11.12 if it had kept pace with inflation since 1968, and If the minimum wage had been indexed for inflation in 1968 to account for the rising cost of living, it would have been between $9 and $14 an hour in 2006 rather than $5.15.

The federal minimum wage hasn’t budged since 2009, when Congress raised it from $6.55 to $7.25 an hour. As the cost of food, gas and housing goes up, the purchasing power of that wage diminishes.

Productivity has nearly doubled since the late 1960s. Some economists argue if minimum wage increased with U.S. productivity over the years, it would be set currently at $26 per hour today.

b) Workers cannot afford basics without it. 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.

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. Additionally, it would need to adjust regularly to keep pace with inflation and cost of living increases.

Proponents also argue many have pointed to the minimum wage not keeping up with inflation as contributing to the worsening wage inequality and overall economic inequality in the U.S..

c) Policy solution: indexation. Many states have already adopted this strategy as part of the multilevel minimum wage increase plan. It will ensure that the value of minimum wage will remain constant and wages will not lose value over time.

Cities and states included the automatic inflation-based increases in their minimum wage laws—mostly enacted over the past decade—with an eye toward helping workers keep up with the cost of living even if a future legislature or city council didn’t choose to set a higher wage rate.

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. This automatic inflation adjustment preserves the buying power of the minimum wage, which has steadily eroded over time.

For example, proposals have required the minimum wage to be increased on January 1, 2014, and every January 1 thereafter, by the cost of living as measured by the percentage increase of the consumer price index calculated by the US Department of Labor.

Supporters note that indexing is a popular tool for legislators to make sure that wages, once they are passed, are not eroding due to inflation.

3. Why others say caution — automatic cost-of-living increases have tradeoffs

a) Regional differences. A flat “one size fits all” wage does not consider the enormous local variations in cost of living and taxes. Because housing costs are so strongly correlated with an area’s overall cost of living, these data allow us to further estimate how a uniform national minimum wage disproportionately and negatively affects communities with low housing costs.

What matters more than the dollar amount of the minimum hourly wage is the amount workers have left after paying taxes and what the remainder buys in goods and services.

b) Business and employment effects. Large minimum wage increases could provide a boost to low-wage hourly workers, while putting an added financial strain on businesses that employ them.

The Congressional Budget Office has noted that Because the federal minimum wage has not been previously indexed to inflation, some employers may have refrained from reducing employment in response to minimum wage increases, realizing that inflation would soon erode the cost of those increases. With automatic indexing, that erosion does not occur, so employment responses could be different and potentially larger in the long run.

Researchers also note that caps are often added: California caps the annual increases at 3.5%, and Minnesota caps them at 2.5%, and some cities have adopted a 3.5% cap on annual increases, but with a carry-forward or catch-up provision to allow excess levels of inflation beyond the cap to be covered by future years’ increases, as a compromise that benefits employees but doesn’t make it unmanageable for employers.

c) Volatility and design issues. Productivity growth, and hence wage growth, is also volatile, varying widely from year to year, which makes tying wages to the wrong index difficult. Some analysts argue that rather than indexing the federal minimum wage to a single national index, workers deserve a regionally-sensitive minimum wage that perpetually keeps pace with what is needed to live.

4. Bottom line

In practice, most places that have decided the minimum wage should keep up have moved away from waiting for Congress:

If the goal of the minimum wage is to provide a minimum standard of living and stabilize the economy — the original purpose when Congress created it in 1938 to protect workers with less bargaining power and create a minimum standard of living — then keeping it linked to cost of living or inflation prevents steady erosion.

If the goal is to minimize potential job losses, avoid burdening small businesses in low-cost areas, or let wages reflect local productivity, then automatic national indexing may be too blunt, and a regional or capped approach may be preferred.

Many economists and policymakers therefore support a middle path: raise the base wage to a more adequate level and then index it to inflation or local cost-of-living, often with annual caps, regional tiers like Oregon's three-tiered wage scale, or periodic review — so the minimum wage preserves its purchasing power without causing sharp, unpredictable jumps like the 8.9% increase Denver saw when inflation spiked.