The Real Minimum Wage Problem

The Real Minimum Wage Problem

Jordan Rogers

In his State of the Union address on Tuesday, President Obama called on Congress to raise the minimum wage to $10.10 from its current rate of $7.25.[1] However, the President’s speech failed to call for legislation which would also adjust the minimum wage to account for the effects of inflation.[2] This measure, arguably, would make more of a difference in the living standards of those who work for minimum wage.

To demonstrate the effect of inflation on the minimum wage, one need only consider the answer to the following question: What is the highest that the U.S. minimum wage has ever been? If your answer is the current statutory minimum wage of $7.25 you would be both right and wrong. In nominal[3] terms, the current statutory rate is the highest it has ever been.[4] In fact, since the first minimum wage of $0.25 was set in 1938 it has been raised on twenty-two occasions[5], resulting in a twenty-nine fold increase.[6] If the analysis were to stop here, it might seem that the minimum wage had steadily and significantly increased.

However, the analysis cannot stop here, but must take account of the effect of changing prices of consumer goods and services during the life of the minimum wage. The reason this matters is that if the prices of the goods and services that consumers buy increase faster than their wages, their buying power is diminished. By contrast, if wages increase faster than the costs of goods and services the buying power their buying power is increased.

When the minimum wage is adjusted from nominal to real terms, the narrative is considerably different that it appears on its face.[7] Adjusted for inflation, the federal minimum wage started at $4.08 in 1938 and peaked in the 1968 at $10.77.[8] Viewed in real terms, the minimum wage has, from its inception to its current level, actually failed to even double (compared to a twenty-nine fold increase when considered in nominal terms). Further, whether the current proposal to set the minimum wage at $10.10 would really be a raise, as President Obama implied in his State of the Union address, for minimum wage workers is dubious at best. President Obama said that Congress should “[g]ive America a raise.”[9] However, how many workers would really consider it to be a raise if their wages had fallen over three dollars from their peak and were now going to be raised to a level still below their peak? This is exactly the situation that minimum wage workers find themselves in when you consider wages in real terms. The counter argument is that the comparison should be between the real minimum wage in recent years and the proposed minimum wage. It is true that if this is the measure, then $10.10 per hour would be a raise in both nominal and real terms.

However, unless this amount is indexed to inflation minimum wage workers are likely to see the real value of their wage decline as the economy begins to recover and inflation becomes more of a concern. Whether the minimum wage is raised to $10.10 or not, policy makers need to consider tying minimum wage to inflation so that future minimum wage workers are at least as well off in real terms as current minimum wage workers.


[1] Transcript: Obama’s State of the Union Address as Prepared for Delivery, NPR (Jan. 28, 2014 9:33 PM), http://www.npr.org/blogs/itsallpolitics/2014/01/28/267901424/transcript-obamas-state-of-the-union-address-as-prepared-for-delivery.

[2]Current federal law does not automatically adjust the minimum wage to account for inflation. http://www.dol.gov/whd/minwage/q-a.htm.  Although the President failed to call for a mechanism which would tie the minimum wage to inflation, he has at other times called for this change. See The President’s Plan to Reward Work by Raising the Minimum Wage, The White House, http://www.whitehouse.gov/sites/default/files/uploads/sotu_minimum_wage.pdf (last visited Feb. 1, 2014).

[3] Definition of nominal: “An unadjusted rate, value or change in value. This type of measure often reflects the current situation, such as the current price of a car, and doesn’t make adjustments to reflect factors such as seasonality or inflation, which provide a more accurate measure in real terms.” Nominal, Investopedia, http://www.investopedia.com/terms/n/nominal.asp (last visited Feb. 1, 2014).

[4] Craig K. Elwell, Inflation and the Real Minimum Wage: A Fact Sheet, Congressional Research Service (Jan. 8, 2014) http://www.fas.org/sgp/crs/misc/R42973.pdf.

[5] Id.

[6] In nominal terms.

[7] The analysis that follows is based on data comparing the minimum wage in real and nominal terms in each year that it has been adjusted. Though, the frequency with which the minimum wage has been changed provides a relatively complete picture, there may be some discrepancies when compared to analyses that account for the effect of inflation in every year over the course of the minimum wage’s life.

[8]  Craig K. Elwell, Inflation and the Real Minimum Wage: A Fact Sheet, Congressional Research Service (Jan. 8, 2014) http://www.fas.org/sgp/crs/misc/R42973.pdf.

[9]Transcript: Obama’s State of the Union Address as Prepared for Delivery, NPR (Jan. 28, 2014 9:33 PM), http://www.npr.org/blogs/itsallpolitics/2014/01/28/267901424/transcript-obamas-state-of-the-union-address-as-prepared-for-delivery.

Advertisements

One thought on “The Real Minimum Wage Problem

  1. The direction of the life of world humanity takes a positive turn. With its light and heat all activities ensue on earth and many resources are unearthed.
    Whatever conflicts one has in life can only be with one’s self,
    because absolutely no other reality, force, or aspect exists
    outside of you.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: