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

Should minimum wage track the cost of living? I'll pull current data on prices, purchasing power, and living wages to lay out both sides.

Whether the minimum wage should keep up with the cost of living is a policy question, but economically if it does not, its purchasing power declines.

1. What happens if it does not keep up?

Nothing in federal law requires it to keep pace with inflation, productivity, or any measure of what things actually cost. That design choice is a major reason the minimum wage and a living wage have drifted apart.

The federal minimum wage has been raised 22 times since it was first established in 1938, with the most recent increase in 2009 from $6.55 to $7.25. It has now been 17 years without a raise, the longest period without an increase in history.

Adjusted for inflation, its purchasing power has declined since the late 1960s. For example, in 1968, the nominal value was less than $2.00 per hour, but the inflation adjusted value was over $11.00 per hour.

Today the federal minimum wage remains at $7.25 per hour, a rate that has not been increased since 2009 and now represents the lowest purchasing power for American workers in over 70 years when adjusted for inflation. In 1968, the minimum wage reached its peak purchasing power, worth roughly $15 in today's dollars.

If the minimum wage had simply kept pace with the cost of living since its peak in 1968, it would be over $15 per hour today. Because it hasn't, every year Congress fails to pass an increase, workers at the bottom essentially receive a pay cut as the price of milk, rent and insurance rises while $7.25 remains static.

The gap is visible in living-wage calculations:

In Ontario, although the rate increase is adjusted for inflation each year, it bears no relation to the cost of living. It is an arbitrary amount.

The original intent when President Franklin D. Roosevelt signed the Fair Labor Standards Act in 1938 was that “no business which depends for existence on paying less than living wages to its workers has any right to continue in this country”.

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.

2. Why many argue it should keep up

The central argument in favor of a minimum wage is that it puts more money in the paychecks of low-income workers, based on the claim that no one's wages should be below a certain standard for quality of life given the overall cost of living conditions.

Advocates list benefits including:

Many states and regions have adopted automatic indexing for this reason:

Without indexing, proponents argue low-paid workers lose ground on rent and food costs that have been rising above inflation, leading to a squeeze on living standards.

3. Arguments against automatic cost-of-living indexing

Opponents warn about trade-offs:

4. What does the evidence show?

Looking across many studies, the central conclusion is that current minimum wage levels do not have any systematic impact on economic growth or unemployment; however, they can have a negative impact on certain businesses and the affordability of certain consumer goods and services.

However, researchers note a tipping point: if minimum wages are increased over 60% of median wages, there is concern firms will not be able to absorb wage increases and employment will fall. How rapid the increase is, whether firms have monopsony power, and local cost differences also matter.

Bottom line

Whether to index fully to the cost of living versus to general inflation (CPI) versus to a regional living-wage calculation remains the core policy debate.