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

Your question touches a classic cost-of-living debate — I'll pull current data on how minimum wage tracks inflation and living costs.

Whether it "needs" to depends on what you want the minimum wage to do - but in economic terms, if it doesn't keep up with cost of living, it loses value.

1. What "keeping up" means

The cost of living is generally measured by inflation, the rate at which prices for goods and services increase.

The formula often used is: Real Minimum Wage = Nominal Minimum Wage / (1 + Inflation Rate).

2. Has the U.S. minimum wage kept up?

No, at the federal level.

Changing the general federal minimum wage requires a change in federal law; it does not automatically adjust for inflation. The rate has remained at $7.25 per hour since July 24, 2009.

Originally, the minimum wage was set to keep workers out of poverty. However, it has not kept up with the cost of living.

Because of this, many states and cities now do try to keep up. Some states automatically adjust their minimum wage annually based on inflation or cost-of-living formulas. Four states — Washington, Oregon, Vermont, and Florida — now index their minimum wages to prices using the CPI.

3. Arguments FOR keeping it indexed to cost of living

Proponents argue:

a) Preserve purchasing power and prevent poverty: "Increasing the minimum wage and adjusting after inflation will allow parents to meet their children's basic needs year after year regardless of market fluctuation". Tying the minimum wage to inflation can help sustain workers' ability to cover expenses as cost of living increases.

b) Fairness: Supporters pointed out the difficulty of raising a family on the current minimum wage, and argued that tying the minimum wage to inflation was more fair.

c) Predictability for workers and employers: Indexing assures that low-wage workers do not lose ground to rising prices — ground they can ill-afford to lose — and offers their employers predictable and steady changes. For both employees and employers, increases would be regular, predictable, and tied to a neutral standard, instead of the political climate in Congress.

Other benefits often cited include reduced in-work poverty, reduced inequality, and higher consumer spending, since low-wage workers spend additional earnings quickly.

4. Arguments AGAINST or cautions about automatic cost-of-living indexing

Opponents and economists warn:

a) Business costs and jobs: Past minimum wage increases have led to inflation, job losses, and small businesses closing. Higher minimum wages can increase operating costs for businesses, especially small and medium-sized enterprises.

b) Wage-price spiral: Business groups have decried pushing the minimum wage to match inflation, and the Reserve Bank of Australia has warned against tying wages to inflation. Labor's comments have sparked worries of a wage-price spiral, in which wages push up inflation which pushes up wages in a vicious cycle.

The mechanism is: employers pass costs to customers, raising prices; workers then need higher wages to keep up, creating a self-perpetuating inflationary spiral. Other analysts note the effect is real but routinely overstated — a 10% wage floor increase produces price effects in the range of 0.3% to 0.4%, concentrated in low-wage industries.

c) Indexing from too low a level: Indexing does not increase the minimum wage relative to prices; it locks the wage in place. If indexed from a historically low level, it will keep it at a low level, valuing work too little. The fear is that once indexing is in place it will take the political steam out of proposals for larger needed increases.

d) Loss of flexibility in recessions: Opponents argue that during periods of economic downturn or high inflation, price-based indexing will lead to a runaway minimum wage that causes economic harm.

Research on states that do index, however, found Washington indexed its wage through the most recent recession with no ill-effects; during that period, low-wage sectors actually outperformed higher-wage sectors, and annual adjustments did not fuel inflation.

5. Middle-ground approaches

Many economists and policymakers distinguish between two goals:

In practice, most U.S. states that index use a price index, while countries like the Netherlands base automatic increases on average wage growth.

> Bottom line: If the policy goal of the minimum wage is to be a wage floor that allows full-time work to afford basic needs and stay out of poverty, then it mathematically must rise with cost of living — otherwise its purchasing power falls every year. If the goal is only to set a bare legal minimum and let the market determine higher wages, then automatic cost-of-living adjustments may be seen as less necessary, but the trade-off is that full-time minimum-wage workers fall further below a living wage over time.

Do you want to look at what a cost-of-living adjusted minimum wage would be in your specific state or city versus the current rate?