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

Leans yesSays it is contested

Should minimum wage track living costs? I'll examine the arguments and evidence for indexing pay to inflation.

Yes - if the purpose of the minimum wage is to be a living wage - it needs to keep up with the cost of living to maintain its purchasing power. Whether it should be designed that way is debated.

1. What the minimum wage was designed to do

The Fair Labor Standards Act of 1938 which created the federal minimum wage was intended:

> to provide a minimum wage, overtime pay, record keeping requirements, and child labor regulations. The purpose of the minimum wage was to create a minimum standard of living to protect the workers in the labor force from being exploited by large corporations.

President Franklin Roosevelt explained it as:

> “It seems to me to be equally plain that no business which depends for existence on paying less than living wages to its workers has any right to continue in this country…and by living wages I mean more than a bare subsistence level – I mean the wages of decent living.”

Today, the minimum wage law’s purpose is described as to establish a living wage for lower-income people.

If that is the goal, then logically it must rise as prices rise. As one analysis notes:

> When the minimum wage is not keeping pace with the cost of living and inflation rates, impoverished workers bore the brunt of the damage. However, if the minimum wage is updated to progress alongside these two factors, a livable wage is likely to be achieved.

2. What happens when it does NOT keep up

In the United States the federal minimum wage is not an indexed benefit:

> It is not an indexed benefit, so it does not increase based on the rate of inflation.

> the federal minimum wage has remained static at .25 per hour since 2009 and is not adjusted along with inflation.

The economic effect is:

> When inflation occurs, the prices of goods and services increase while the nominal value of the minimum wage remains unchanged... the real purchasing power of that $10 declines. This means that workers can buy fewer goods and services with that same wage as time goes on, effectively reducing their standard of living.

That is why:

> the meagre increase that minimum wage earners will receive on Oct. 1 is nowhere near what is required to keep up with the accelerating cost of living.

In Ontario, for example, although the rate increase is adjusted for inflation each year, it bears no relation to the cost of living. It is an arbitrary amount, and the gap between the minimum wage and a calculated living wage continues to grow.

One estimate of how far it has fallen behind: If the minimum wage had kept up with worker's productivity, then the minimum wage would be $24 an hour.

3. Arguments FOR indexing to cost of living

Proponents argue:

•Poverty reduction and fairness: Changes are needed to help incomes keep pace with increasing costs of living, and a higher minimum wage will lift millions out of poverty.

•Make ends meet and keep up with inflation: advocates say that increasing the minimum wage could help low-wage hourly workers make ends meet and keep up with inflation.

•Economic stimulus: Raising the minimum wage will help workers keep up with the cost of living and bolster the consumer spending that businesses and the economy depend on.

•Reduced inequality and productivity incentives: The arguments for raising the minimum wages include – reduced in-work poverty, a reduction in inequality, an incentive to increase labour productivity and higher wages leading to increased economic growth.

•Stability: Indexing the minimum wage to inflation mitigates the need for periodic political debates and ensures that wages keep pace with the cost of living without sudden shocks to businesses.

That is why some places do index automatically:

> In Minnesota, the minimum wage is adjusted annually to keep pace with the cost of living... based on changes in the Consumer Price Index (CPI), which measures the change in prices for goods and services over time. This adjustment ensures that the minimum wage remains a livable wage for workers in Minnesota and keeps up with inflation.

> The federal minimum wage is indexed to Canada's annual average CPI and adjusted every April 1, a system that has delivered consistent, inflation-linked increases since 2021 without political interference.

4. Arguments AGAINST or for caution

Opponents and economists warn that simply raising the wage to match costs has trade-offs:

> On the negative side, increasing minimum wages too fast could cause a rise in business costs, a rise in unemployment, and higher prices for consumers – problems exacerbated in depressed, low wage sectors and regions.

Specific concerns:

•Employment effects: While studies have found employment effects negligible at moderate levels, there is a tipping point at which increases in the minimum wage will have a negative effect on employment. In particular, if minimum wages are increased over 60% of median wages, there is a concern that... employment will fall.

•Higher prices: Firms respond to an increase in costs by passing some of the costs onto consumers... nearly all of the cost increase was passed through to consumers, as prices rose 1.45% on average.

•Wage-price spiral: Opponents argue higher wages could have several negative repercussions: leading to inflation, making companies less competitive, and resulting in job losses.

Some argue raising the wage floor cannot guarantee affordability if other costs rise faster:

> Governments can raise the wage floor. They cannot guarantee that the cost of living stops rising above it.

Bottom Line

•Does it have to by law? No. In the U.S., nothing in the law requires it to keep pace with inflation, productivity, or any measure of what things actually cost.

•Does it need to to fulfill its original purpose as a living wage? Yes. Without indexing, inflation erodes its value every year and it ceases to provide the "minimum standard of living necessary for health, efficiency, and general well-being" it was created to protect.

Most economists and policymakers who support a cost-of-living link therefore recommend:

1.Indexing to a price index like CPI, but with a cap or smoothing to avoid shocks,

2.Regional adjustments - because a single national wage does not reflect regional cost-of-living differences,

3.Gradual, predictable increases so businesses can adjust via productivity and pricing rather than layoffs.

If the goal is only to set a bare legal floor and leave a "living wage" to the market, collective bargaining, or supplemental benefits, then indexing is a policy choice, not a necessity. If the goal is to ensure full-time work prevents poverty, then indexing is widely considered necessary.

Citations (4)

1ungvanguard.orgNonprofits and think tanks
The History and Benefits of Raising the Minimum Wage
Backs: “The Fair Labor Standards Act of 1938 which created the federal minimum wage was intended: to provide a minimum wage, overtime pay, record keeping requirements, and child labor regulations. The purpose of the minimum wage was to create a minimum standard of living to protect the workers in the labor force from being…”
evidence, article, points to yes. Claim: The Fair Labor Standards Act created the minimum wage to establish a minimum standard of living and protect workers from exploitation.
2swartz-legal.comCompanies
What Is The Purpose Of Minimum Wage? | Swartz Swidler
Backs: ““It seems to me to be equally plain that no business which depends for existence on paying less than living wages to its workers has any right to continue in this country…and by living wages I mean more than a bare subsistence level – I mean the wages of decent living.””
attribution, article, points to yes. Claim: Roosevelt said businesses paying less than living wages have no right to continue, and that living wages mean decent living.
3economicshelp.orgCommercial contentquality 0.84
Pros and Cons of Raising the Minimum Wage
Backs: “Economic stimulus: Raising the minimum wage will help workers keep up with the cost of living and bolster the consumer spending that businesses and the economy depend on. Reduced inequality and productivity incentives: The arguments for raising the minimum wages include – reduced in-work poverty, a reduction in…”
evidence, article, points to yes. Claim: Arguments for raising the minimum wage include reduced in-work poverty, reduced inequality, productivity incentives, and economic growth; raising it helps workers keep up with living costs.
4stateregstoday.comData and tools
Cost of Living Adjustments in Minnesota
Backs: “based on changes in the Consumer Price Index (CPI), which measures the change in prices for goods and services over time. This adjustment ensures that the minimum wage remains a livable wage for workers in Minnesota and keeps up with inflation.”
evidence, article, points to yes. Claim: Minnesota adjusts its minimum wage annually based on CPI changes so it remains livable and keeps up with inflation.