The Real Minimum Wage Keeps Getting Smaller. Here’s Why
It seems like the U.S. federal minimum wage is always in the news. Activists on the left believe Congress should raise it to $15 an hour, but opponents argue that doing so will eliminate too many entry-level jobs. What gets lost in the debate is a basic understanding of how often Congress has raised the minimum wage in the past, and how the current rate of $7.25 stacks up against previous levels. We created a visualization to find out. We plotted the federal minimum wage for every year since 1940 (the blue). We then adjusted for inflation to reflect how much purchasing power an hour’s work would be worth today (the green). For example, workers earned $0.40 per hour in 1945, which doesn’t seem like much, but it gave you the ability to purchase the equivalent of $5.90 worth of stuff in 2017 dollars. Anyone remember when candy bars cost a nickel?
The problem underlying the minimum wage debate is inflation. These days, inflation averages about 1-2% each year, meaning that if you bought the exact same things this year as you last year, it would cost you a little more. That’s called purchasing power. Most people don’t notice it because their incomes also tend to edge upward over time.
If you think about the minimum wage in terms of purchasing power, you can see how an hour’s labor was worth more in the 1960s. Low-wage workers could do the most with their paychecks in 1968, when they earned more than $10/hour in 2017 dollars. Congress passed a few adjustments in the 1990s and 2000s, but the wage is back to the same level it was in the 1980s.
What can be done about the slow erosion of the minimum wage? Cities and states can pass their own minimum wage laws, but most people work in places without a local ordinance. If Congress does nothing, then the federal level stays the same at $7.25/hour.
Here’s one way to solve the problem that appeals to both sides of the debate. What if Congress indexed the minimum wage to inflation? If things cost 2% more next year, then the wage would increase 2%. Workers would benefit because their take-home pay would slowly rise, and businesses would benefit because raises would become predictable. That’s what we call a win-win.
Sources: Table 1.1