Navigating a Federal Minimum Wage Tied to Inflation

Succinct minimum wage policy proposals entail a federal minimum wage tied to inflation in order to curb the erosion of consumers’ purchasing power, which measures the value in money for which consumers may purchase goods or services. Determining the logistics of such a proposal can be exceptionally difficult, especially considering the numerous economic indicators used to measure inflation. Some suggestions go a step further in explaining their thought process, and recommend inflation be linked to the Consumer Price Index (CPI). When examining the relationship between the minimum wage and workers, the CPI is used as the inflation indicator because it relates directly to people.

The CPI is an economic indicator of inflation that examines the change in the weighted average of prices in a basket of consumer goods and services over time. To understand the mechanics of the 'basket of goods', envision a shopping cart. Now, begin filling that cart with everyday products like food, clothing, furniture, a haircut, trips to the doctor’s office, and a range of other goods and services that are typically consumed. Well-ah, a successful CPI basket has been created!

In order to determine what the country’s basket looks like, the Bureau of Labor Statistics (BLS) conducts a quarterly survey with 7,000 Americans known as the Consumer Expenditure Survey. Americans write down every purchase as well as the price associated with the specific good or service. The detail of these diary entries allows the BLS to measure American consumers’ buying habits in relation to their expenditures, income, and family characteristics.

The most widely used variation of the CPI is the Consumer Price Index of all Urban Consumers, (CPI-U). This basket reflects the prices that approximately 87% of the country’s residents face, including the spending habits of people who are self-employed, unemployed, and retired. It includes those below the poverty line and those above it. The CPI does not include rural areas, farmers, people in the Armed Forces, or those in institutions such as prisons and mental hospitals.

Once the CPI basket has been established, it is then compared across time periods to measure the degree of year-to-year change. The amount of change indicates the strength of an American consumer’s dollar. If the prices in an American’s basket of goods increase by 3% in 2017 and her wage is not adjusted for inflation, she will be able to afford less in 2017 than she did in 2016. Now imagine that same person four years later still making the same minimum wage from 2016. Assuming prices continue to rise at an average rate of 3% each year, by 2020 she can only afford 88% of her typical basket of goods and services. Linking the federal minimum wage to the CPI aims to preserve consumer purchasing power by measuring inflation as experienced by consumers and having the federal minimum wage adjust accordingly. Although the purpose of indexing the federal minimum wage to the CPI is clear, there are two central arguments that arise.

The first is the fear that indexing the minimum wage at a low level will keep the wage permanently low. This could potentially hinder low-wage workers in supporting themselves and their families. If the initial minimum wage that is tied to the CPI is too low, then that wage will remain the base amount paid to workers for years to come. This repercussion limits the purchasing power and the quality of life of minimum wage workers. The concern of this viewpoint is not the method of indexing, but instead, the lack of political attention the minimum wage will garner once it is indexed. Thus far, states that have begun indexing their minimum wage to the CPI have started at relatively high base wages.

The second argument against indexing rests on the platform that in recessionary years the minimum wage will creep too high causing an economic imbalance. During the Great Inflation of the 1970s, the inflation rate rose upwards of nearly 15%. Economists fear that if an event like this were to occur again, the minimum wage would spiral out of control at a rapid rate. Additionally, it is not uncommon to see average wage growth lag during recessions. With that being said, if the minimum wage is tied to inflation, it will be costlier to employ low-wage workers –resulting in possible unemployment increases. On the contrary, prices generally rise across the board during inflationary periods, which means wages also increase faster. States such as Washington, Oregon, Vermont and Florida have all indexed their minimum wages to the CPI and have seen great success in sustaining consumer purchasing power and mitigating the risks of excess inflation.

Cases such as these force policymakers to think critically about implementing a sustainable structure that will effectively tie the federal minimum wage to the CPI. They also illuminate the importance of ensuring that low-wage workers do not see their wages continue to decline over time. Moving towards a minimum wage tied to inflation is a modest step towards achieving this goal. It is no surprise that increasing the federal minimum wage has been one of the most heavily debated subjects during the 2016 presidential election, and investigating the components of these proposed policies are essential for economic stability, growth, and equality. Missed our first article on minimum wage? Head back and read about its history here.