Inflation and the Buying Power of the Minimum Wage

by Fred Siegmund

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President Obama has proposed an increase in the minimum wage to $10.10 an hour that may or may not be considered and passed by Congress. The last increase in the minimum wage was July 24, 2009, when it went up to $7.25 an hour. Even though inflation rates are low, a wage fixed for almost 5 years loses buying power over time.

How much buying power changes depends on the comparison years. For example, the minimum wage in 2000 was $5.15 an hour, but now it is $7.25 an hour. To have the buying power of the 2000 minimum wage in 2013, the 2013 minimum wage would need to be $6.97. Instead, it is $7.25, a 3.9 percent increase in the buying power of the minimum wage from 2000 to 2013. Buying power adjustments to value are made with the all city Consumer Price Index published by the Bureau of Labor Statistics.

However, the minimum wage has a history of remaining fixed for long periods. One period was 1981 to until 1989, when the minimum wage was fixed at $3.35 an hour. Another was the late 1990’s until 2007 when the minimum wage was fixed at $5.15 an hour. It was these long periods where the buying power declined the most. For example, to have the buying power of the 1980 minimum wage, the 2013 minimum wage would need to be $8.76 an hour. Instead, it is $7.25 an hour, a 21% decrease in the value of the minimum wage from 1980 to 2013.

To have the buying power of the 1960 minimum wage, the 2013 minimum wage would need to be $9.84 an hour. Instead, it is $7.25, a 35.7% decrease in the buying power of the minimum wage from 1960 to 2013.

Between 1960 and 1990, the minimum wage lost 64% of its buying power. Inflation in the late 1970’s and early 1980’s ran as high as 11% a year and low wage jobs lost significant value during these years. Between 1990 and 2013, the minimum wage has recovered 17.6% of its lost value. For those who took minimum wage jobs after 1990, their buying power has increased slightly, although almost all of the recovered value has came after 2007. Unfortunately, the value of the minimum wage remains far below what it was in the 1960’s and 1970’s.

Indexing

The minimum wage would be more effective to protect low wage buying power if it was indexed to the Consumer Price Index at the end of each year. A comparison of President Obama’s proposed new minimum wage of $10.10 an hour and $7.25 an hour with an annual cost of living adjustment illustrates the benefit.

For someone earning the minimum wage working full time from 2010 through 2014, their annual income would be $15,080 [$7.25 x 2080]. At a minimum wage of $10.10 an hour they would earn $21,008. The additional income over the old minimum totals $5,928, if the cost of living adjustment comes at the end of this year for the 2015 year.

For someone earning $7.25 an hour adjusted for the published inflation rate applied at the end of the year and a forecast two percent inflation rate through 2014, their wage at the beginning of 2015 would be $8.19 an hour. But here is the surprise: the extra income including the raise they would get for 2015, even at the low $8.19 an hour, comes to $6,704.00 or $776.00 more than the Obama plan. The result assumes any new minimum wage would apply at the beginning of 2015.

In general, the longer the Congress delays a cost of living adjustment for the minimum wage and the higher the rate of inflation, the more benefit from indexing. But that is the purpose of indexing: prevent delays and take advantage of compounding.

The politics of the minimum wage confounds the best hopes for a significant increase in the minimum wage. Even a $10.10 an hour minimum draws complaints and opposition. Business and the Republicans always oppose an increase since it adds costs but not profits. Economists use their most sinister tones to forecast a decline in employment, as if those who lose their low wage job will never work again. Democrats take a more accommodating tone, but have not protected the value of the minimum wage.

If President Obama wants to discuss a living wage indexed to inflation it will be something new after years of the status quo on wages. I am not holding my breath!

About the author: Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

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