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COMMENTARY | Some states and localities have already pegged minimum wage hikes to inflation. But with the federal pay floor stuck at $7.25 for over a decade, it's time for more to take action.
Prices are rising, but a key tool for building a strong economy is not the federal minimum wage. The federal minimum wage of $7.25 has not been increased in 13 years, the longest stretch in our history without an increase since 1938, the year when the federal minimum wage was first implemented.
Researchers at the Economic Policy Institute recently noted that after adjusting for inflation data, the minimum wage sits at its lowest point in 66 years. Put another way, in 1956, the 75 cents per hour wage bought someone as much as $7.25 does today.
New data from the Bureau of Labor Statistics illustrate a clear picture of minimum wage workers. In 2021, more than half of all workers who earned at or below the federal minimum wage lived in the South, largely because many of these states have failed to increase their minimum wage beyond the federal level. More than 60% of those who earned at or below $7.25 were women.
And importantly, the popular belief that minimum wage workers are teenagers who work after school or during summer vacation is completely inaccurate: Most minimum wage workers are adults between the ages of 25 and 54, many of whom are supporting families.
At the same time, these are all groups who are likely to struggle to keep up with rising costs. In June 2022, states in the South experienced higher annual Consumer Price Index increases than those in other regions. Last year, home prices, sometimes assumed to be a problem in only the biggest cities, saw the fastest growth in Kansas City, Missouri, Northwest Arkansas and Tampa, Florida. Unsurprisingly, consumer sentiment is also lowest in the South compared with other regions.
People feel price increases most acutely when the other side of their budget—including their wages—doesn’t change accordingly. Traditionally, economists thought that rising wages would necessarily create what they called a “wage-price spiral,” where rising labor costs were the primary drivers of inflation. But contemporary inflation is much more complex, and there’s little evidence that the wage-price spiral was ever the primary driver of inflation, even in the 1980s. Labor doesn’t make up the bulk of the price of most goods and services, particularly for costs like rent.
Today, there is no evidence that a wage-price spiral is contributing to inflation. Instead, sky-high gas prices due to the war in Ukraine, supply chain bottlenecks in the wake of Covid-19, and changing consumer spending patterns are contributing to inflation around the world.
Higher wages don’t just help families keep up with high costs and rising prices. They’re also linked to less worker turnover and higher productivity, benefiting employers and the broader economy. Being able to pay one’s rent on time and put food on the table has enormous benefits for children’s educational attainment and economic trajectory, strengthening the country’s long-term economic outlook.
Keeping Pace With Inflation
Luckily, the minimum wage doesn’t need to always play catch-up to inflation. Newer minimum wage laws in many states include built-in mechanisms for the minimum wage to keep pace with inflation or with the median wage. Nineteen states, from Vermont to South Dakota, index their wage level, building in automatic increases. Other jurisdictions can do this as well. Santa Fe, New Mexico, and several counties in Maryland have tied automatic increases in their minimum wage to increases in the Consumer Price Index for their region.
Doing this nationally would help families keep up with rising prices automatically, and it would protect the value of the minimum wage from congressional gridlock, also hopefully allowing Congress to focus on the many other policies that low-wage workers need, such as improved access to affordable childcare and paid family and medical leave.
The Biden administration took executive action to raise the minimum wage to $15 for federal contractors starting in 2022. The administration and congressional Democrats have tried to raise the federal minimum wage to $15, eliminate the subminimum wage for people who work for tips and people with disabilities and build in automatic future increases tied to median wages, but they lack the necessary 60 votes in the Senate to accomplish that legislatively.
In the meantime, states and cities must take it upon themselves to help residents deal with rising costs by increasing their minimum wage.
Lily Roberts is the managing director of the poverty to prosperity team at the Center for American Progress. Rose Khattar is the associate director of rapid response and analysis on the poverty to prosperity team at American Progress.