Your question touches a classic cost-of-living debate — I'll gather current data on how minimum wages track inflation and living costs.
Does the minimum wage need to keep up with cost of living is a policy choice, not a current federal requirement, but there are strong arguments on both sides centered on purchasing power, poverty, and employment effects.
1. What "keeping up" means
Generally, indexation is linking one variable's value to changes in another, independent variable. In the case of the minimum wage, indexation would mean the minimum wage rate changes when the index changes. 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.
To maintain the relative value of a wage over time, that wage may be indexed to some measure in the economy. One of the stated goals of the Fair Labor Standards Act in general, and the minimum wage specifically, is to "correct and as rapidly as practicable to eliminate" labor conditions "detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers". Over time the price of goods and services tends to rise. Thus if the minimum wage rate remains fixed, the real value of the minimum wage will decline over time.
The International Labour Organization Convention No. 131 Article 4 also states minimum wage levels need to be “adjusted from time to time to take into account the changes in the cost of living and other economic ... conditions”.
2. What has happened to the federal minimum wage
The federal minimum wage is $7.25/hour. The last time the federal minimum wage was increased was in 2009.
Since then it has lost significant purchasing power:
•The current minimum wage is the lowest it has been in the last 10 years in real (inflation-adjusted) terms. In 1968, the minimum wage was $1.60 per hour – equivalent to $10.15 in today’s dollars. Since then, it has dropped precipitously, losing 29 percent of its value.
•If the minimum wage had kept up with inflation, it would be $10.15 today – nearly three dollars per hour more than it is currently.
•Another calculation: had the minimum wage of $1.60 per hour enacted in 1968 been indexed to the CPI-W at that time, it would be $10.65 per hour in 2016.
•Those earning minimum wage today effectively earn 27.4% less than they would have back in the summer of '09.
•Since it was last raised by Congress in 2009, inflation has cut its purchasing power by 17%.
In practical terms:
•A worker earning the federal minimum wage of $7.25/hour makes only $1,250 a month, while the average family has monthly expenses of about $3,000, which leaves a monthly shortfall of about $1,800. The average cost of monthly rental housing alone is nearly $1,400.
Advocates note that so many other measures are pegged to inflation, yet the minimum wage isn't. Just look at Social Security. Beneficiaries are entitled to an annual cost-of-living adjustment that's specifically tied to inflation.
3. Arguments for indexing to cost of living
Proponents argue the wage should be indexed to prevent erosion:
•Preserve purchasing power: A cost of living adjustment ensures minimum wage will be adjusted each year to keep up with inflation. It will ensure that the value of minimum wage will remain constant and wages will not lose value over time.
•Help workers keep up: Advocates for workers say the wage jumps will help people keep up with the rising cost of living.
•Reduce poverty and public costs: When the minimum wage is not a living wage, families must forego basic necessities, go into debt or get support from government programs like housing assistance, SNAP, Medicaid. Taxpayers effectively subsidize businesses that do not pay enough.
•Indexing is already common at state level: 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. Of the 29 states and DC that have minimum wage rates above the federal rate, a total of 17 states and DC currently, or will in a future year, index state minimum wage rates to a measure of inflation.
•Automatic, predictable adjustments: This mechanism provides for automatic changes in the minimum wage over time and does not require legislative action to make annual adjustments. A similar argument is that a COLA allows for a cost of living increase each year so that the minimum wage keeps pace with inflation at a reasonable level and allows for some predictability for employers.
•Historical precedent: Prior to 1968 Congress quite deliberately chose to increase the minimum wage by more than the rate of inflation to ensure that workers at the bottom got their share of benefits of economic growth.
Many cities and states already tie increases to the Consumer Price Index (CPI-U or CPI-W), such as Alaska indexed to the CPI-U for Anchorage.
4. Arguments against automatic cost-of-living indexing
Opponents and some economists raise concerns:
•Employment effects: Increases in the minimum wage mean an increase in costs for employers. There is a significant probability that higher minimum wages could result in fewer jobs. The Congressional Budget Office finds that if the federal minimum were indexed to median hourly wages after reaching $15 in 2026, that employment in 2028 would be reduced by 1.5 million.
•Hiring of inexperienced workers: Employers report that when their costs are arbitrarily increased, such as with minimum wage hikes, they become more likely to seek out experienced workers and less likely to take a chance on young workers.
•Regional cost-of-living differences: A nationwide minimum wage of $10.10 an hour might have a small impact in pricey urban areas but it would wreak havoc in rural areas where the cost of living — and wages — are generally much lower. A flat “one size fits all” wage does not consider the enormous local variations in cost of living.
•Inflationary feedback: If minimum wage increases result in an increase in the aggregate price level, then the inflationary effects would erode some of the purchasing power.
•Loss of legislative deliberation: Indexation would deemphasize congressional consideration of the minimum wage rate because changes would become automatic. Requiring congressional action allows for the role of the minimum wage in the larger context of the economy (e.g., its relationship to poverty) to be considered with each rate change. Indexation would generally decouple rate setting from other policy considerations related to wage setting.
Some states have addressed these concerns by adding limitssuch as a "hold harmless" provision not to adjust downward, or triggers that pause increases if unemployment is above a threshold.
5. Bottom line
•If the goal is to maintain purchasing power and a minimum standard of living, then keeping the wage indexed to a cost-of-living index like CPI-W or CPI-U is seen as necessary, otherwise its real value declines. The current federal system does not do this automatically – it changes only when Congress amends the FLSA.
•If the goal is to maximize employment or allow flexibility for regional differences and economic conditions, automatic indexing without regard to productivity, business size, or geography is seen as risky.
For that reason, most recent federal proposals combine a one-time raise to restore lost value, then index thereafter to inflation or median wage growth, while many states have adopted annual inflation indexing with caps and floors to balance both concerns.