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

Should minimum wage track living costs? I'll examine current data and competing perspectives.

Whether the minimum wage needs to keep up with the cost of living depends on what you think the minimum wage is for - that is a normative and policy question, not purely economic. Arguments fall into two broad camps:

1. What "keeping up" means

Keeping up typically means indexation - linking the wage to an independent variable like prices or wages so it changes automatically.

For the minimum wage, indexation would mean the rate changes when the index - e.g., prices, wages, costs - changes. The most common proposed indices include different versions of the Consumer Price Index, personal consumption expenditures, employment costs, and hourly earnings.

In practice that would mean:
> Indexing the minimum wage would mean that it would be tied to the inflation rate. If inflation was 2% one year, the minimum wage would increase by 2%

Without indexation:
> If a minimum wage rate is established as a fixed nominal amount and not increased (through either legislative action or indexation), its real value will erode over time due to the tendency of prices and wages to increase over time

2. Arguments that it SHOULD keep up

A. To maintain purchasing power

The stated purpose of Cost of Living Adjustments (COLA) in states like Washington and Montana is that:
> as the cost of living in Washington increases, the minimum wage will also increase to keep up with inflation and maintain its purchasing power for workers

> In Montana, the minimum wage is adjusted annually by the Cost of Living Adjustment (COLA) based on changes in the Consumer Price Index (CPI)

More generally, states that index to inflation do so to ensure:
> it will automatically increase each year based on the rate of inflation. This ensures that the minimum wage keeps pace with the cost of living

The Washington State Attorney General's office phrased it as: to "maintain" means to preserve from failure or decline and "To maintain employee purchasing power, therefore, implies a minimum wage that corresponds to the cost of living, rising and falling with increases or decreases in the cost of living"

Proponents also argue indexing reduces poverty:
> Adjusting the minimum wage for inflation can help reduce poverty: By indexing the minimum wage to inflation, workers will see a gradual increase in pay that keeps up with the cost of living

And that indexation provides:
> predictability and stability for businesses, as employers will have a reasonable idea as to what future wage costs will be, since growth in the minimum wage will be determined by the rate of CPI inflation and not by the vagaries of the legislative process

B. The current gap between minimum wage and living costs

Nothing in U.S. federal law requires the minimum wage to keep pace:
> Nothing in the law requires it to keep pace with inflation, productivity, or any measure of what things actually cost

That design choice is cited as the biggest reason the minimum wage and a living wage have drifted apart.

Examples of the gap:

> We are currently in the longest period of inaction on the federal minimum wage since its inception in 1938. It was 17 years ago this month that it was increased to $7.25 — which leaves today's wage floor at its lowest (inflation-adjusted) value in seven decades

In constant 2016 dollars, the value has varied from $3.96 (1948) to $10.98 (1968), with 1968 often cited as the peak purchasing power.

3. Arguments that it should NOT automatically keep up, or that doing so has trade-offs

A. Different costs of living in different places
A uniform, nationally-indexed wage can be impractical:
> A uniform minimum wage could disproportionally impact a small business in a state with a low cost of living. For example, to have the same minimum wage would be impractical in California and Oklahoma, as the average value of a home... is $635,055 in California but only $143,173 in Oklahoma

Similarly, critics note:
> Cost of living differences within the state: The cost of living can vary significantly across different regions within Illinois, so one set minimum wage may not adequately reflect the needs of all workers

B. Effects on employment, businesses, and prices

The literature widely debated includes:
> potential job losses or reduced hiring, especially among low-skill workers or small businesses; possible automation, higher costs for businesses, distorted labor markets in low-cost regions, and rising consumer prices

Opponents argue:
> They contend that a higher minimum wage can increase prices for consumers and hurt small businesses, which often operate on thin profit margins

And that:
> A higher minimum wage will cut employment, reduce access to the entry-level positions that lead to better jobs... it raises the cost of hiring at companies that employ low-wage workers

There is also concern about a wage-price spiral:
> Potential for inflation: A sudden and large increase in the minimum wage could lead to higher inflation rates and potentially negate the benefits of higher wages

C. Institutional concerns

A Congressional Research Service report noted trade-offs of indexation itself:

Indexing provides regular adjustments and maintains relative value, but
> indexation may also reduce regular oversight of minimum wage changes because it automatically adjusts the rate

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, while the federal government does not. Most recent proposals in Congress would combine a series of nominal rate increases, followed by indexation to a consumer price index.

4. Bottom line

Many states have taken a middle path: set a higher base than the federal $7.25, then automatically index future increases to CPI so the wage does not lose purchasing power between legislative actions, while leaving room for periodic legislative review.

Do you want to evaluate this from the perspective of workers, employers, or overall economic policy - for example, should we index to CPI inflation, to median wages, or to a local living wage calculation?