Inflation Pushes Minimum Wages Higher in Some States

This story was originally posted by Stateline, an initiative of the Pew Charitable Trusts.

Low-wage workers in more than a dozen states — and many more cities — could get unexpectedly large raises next year, thanks to minimum wage increases that will reflect soaring consumer prices.

Denver’s minimum wage, which is indexed to consumer prices in the metro area, will increase from $15.87 to $17.29 an hour starting Jan. 1. Colorado’s minimum wage, which is indexed to the same measure, will likely increase from $12.56 to $13.64 an hour, according to Stateline’s calculations. 

Of the 13 states and Washington, D.C., that will index their wage floors to inflation next year, only Minnesota and California have announced their new numbers. Their increases will be relatively small, as both states limit the yearly percent change in their minimum wage. 

Minnesota’s minimum will rise from $10.33 an hour to $10.59 an hour for large employers and from $8.42 an hour to $8.63 an hour for small employers. California’s minimum will rise from $15.00 to $15.50. 

In other states, the increases are likely to be much larger. 

Consumer prices rose more than 8% from July 2021 to July 2022. By using July consumer price data as a rough estimate, Stateline calculates that minimum wages could rise by about $1 an hour in many states, including Arizona, Ohio and South Dakota. 

Many states use data published by the federal Bureau of Labor Statistics in the fall to calculate their minimum wages. Colorado’s minimum wage, like Denver’s, relies on data published in August.

In total, 27 states and Washington, D.C., will raise their minimum wages next year, either because of inflation or previously scheduled increases, according to the Economic Policy Institute, a left-leaning Washington, D.C., think tank. A lower minimum wage for workers who earn tips also will increase in many of those states.

Advocates for workers say the wage jumps will help people keep up with the rising cost of living. Advocates for businesses, meanwhile, say the increases will hurt employers already struggling with rising supply and labor costs.

“A wage increase of this magnitude without an option to increase the tip credit for tipped workers is devastating to the Denver restaurant industry,” said Sonia Riggs, president and CEO of the Colorado Restaurant Association, in an emailed statement.

Economists and policy experts, however, say the inflation-driven minimum wage increases are neither unusually large nor likely to lead to layoffs.

Federal, state and local governments have raised their wage floors by 10% or more in past years without disturbing the economy much, experts say. 

“This is well within our previous experience,” said Michael Reich, chair of the Center on Wage and Employment Dynamics at the Institute for Research on Labor and Employment of the University of California, Berkeley. 

And experts note that businesses are so desperate for workers right now that many already are paying cashiers, dishwashers and other low-wage staff above the minimum wage. 

“Employers are having to compete to attract staff, and this is particularly true in low-wage industries such as leisure and hospitality,” said David Cooper, director of the Economic Analysis and Research Network at the Economic Policy Institute.

Target retail stores in the Denver area, for instance, are advertising jobs stocking shelves and working cash registers for $16.50 an hour.  

Wages for the lowest-paid workers in the United States have in recent months risen faster than wages for higher-paid workers, said John Robertson, a senior policy adviser and economist at the Federal Reserve Bank of Atlanta who tracks wage growth. The tight labor market is likely the biggest driver, he said.

The minimum wage isn’t going up everywhere next year. Twenty-three states have no minimum wage increases scheduled. Twenty of those states set their minimums at or below the federal minimum of $7.25 an hour, according to the Economic Policy Institute. The federal minimum wage, which amounts to an income of about $15,000 a year for somebody who works 40 hours a week, hasn’t changed in more than a decade.

And minimum wage laws don’t apply to all workers. Federal law excludes full-time students, independent contractors and certain workers with disabilities, among others.

Many states are raising wage floors this year thanks to ballot initiatives approved over the past decade. South Dakota’s 2014 ballot measure, for instance, raised the minimum wage from $7.25 to $8.50 an hour in 2015 and in subsequent years, required the wage floor to rise with the consumer price index for U.S. cities.

Initiative backers wanted the minimum wage to keep rising, said Rick Weiland, a South Dakota Democrat who made the initiative part of his platform as an unsuccessful U.S. Senate candidate that year. 

“There was a concerted effort to make sure it was something we wouldn’t have to do every five years or 10 years,” he said.

South Dakota’s $9.95 minimum wage still isn’t enough to comfortably live on, Weiland noted. The state labor department is expected to announce next year’s wage floor by October.

Economists agree that raising the minimum wage will, at some point, force employers to lay off workers as labor costs rise, Reich said. But they disagree on when, and to what degree, layoffs will happen.

The Congressional Budget Office in 2019 estimated that raising the federal minimum wage to $15 an hour by 2023 — more than doubling it in five years — would lead about 1.3 million people to lose their jobs. 

But research into the effects of past minimum wage increases suggests that so far, even fairly large changes haven’t had much impact on employment. 

For instance, California’s minimum wage has increased since 2014 from $8 to $15 an hour, almost doubling over eight years. Thirty-eight cities and counties in the state have set their wage floors higher than $15.

Yet a forthcoming paper from Reich and colleagues at the University of California, Berkeley and University of California, Davis finds substantial wage increases but no significant effect over that period on employment among California teenagers and restaurant workers, groups that are among those most affected by minimum wage laws.

Reich said there are a few possible explanations: Employers may be covering the cost of higher wages by raising prices. Or they may have found that higher wages encourage workers not to quit, thus reducing hiring and training costs.

Unions and worker advocates have been campaigning since 2012 for a $15 hourly minimum wage. But with inflation pushing the cost of living higher, they’re now reaching for a new target.

Hawaii Democratic Gov. David Ige recently signed a law that will raise the state minimum wage to $18 by 2028. California voters will in 2024 consider a ballot measure that would raise the wage floor to $18 an hour by 2026. That rate would amount to annual wages of about $37,000. 

Cooper, of the Economic Policy Institute, said that $18 an hour in 2028 could be worth $15.50 an hour in today’s dollars. 

“It seems high, but when you consider what inflation might look like over the next few years, it’s probably not as high as it seems,” he said.