On Jan. 1, nearly a million workers in 10 states will see the value of their paychecks preserved against inflation. Workers in Arizona, Colorado, Florida, Missouri, Montana, Ohio, Oregon, Vermont, and Washington are protected each year by automatic indexing of their state’s minimum wage. Indexing links the value of the state minimum wage to inflation so that as prices go up, so does the amount that minimum-wage workers must be paid. Low-wage workers in Rhode Island will also see a small boost to their incomes in 2013 thanks to a one-time increase in their state’s minimum wage that was enacted this past June.
Table 1 summarizes the increases taking place on New Year’s Day. They range from 10 to 15 cents, with the exception of the 35 cent one-time increase in Rhode Island. Across these 10 states, roughly 855,000 workers will be directly affected, meaning that they currently earn a wage between the existing minimum and the new minimum. Another 140,000 workers with wages just above the new minimum are also likely to see a small raise as employers adjust their overall wage ladders to reflect the higher wage floor. These wage increases translate into an additional $290 million in new wages for low-wage workers, with average increases in annual pay ranging from $190 in Missouri to $510 in Rhode Island.
For a low-wage worker, these increases are a vital protection against rising costs. In states without indexing, inflation slowly erodes the value of minimum wage workers’ pay. The federal minimum wage, at $7.25 per hour, has already lost about 7 percent of its value since it was last raised in July 2009. At its high point in 1968, the federal minimum wage was equal to about $9.85 per hour in Nov. 2012 dollars—36 percent higher than today’s federal minimum wage.1
As workers’ purchasing power declines due to inflation, they’re not able to buy the same volume of goods and services they previously could. Not only is this dangerous for workers earning the bare minimum, but it lowers economic activity and costs jobs. The last two columns in Table 1 describe the output and jobs supported by this year’s indexed increases. The $290 million in additional spending power for low-wage workers will generate $184 million in output (GDP), which will support 1,600 jobs that we would lose if these increases did not take place.
Rather than having to hike the federal minimum every few years in order to undo the erosion of the real value of the minimum wage caused by inflation, Congress should simply follow these states’ leads and index the federal minimum for automatic inflation-adjustment each year. The Harkin-Miller Fair Minimum Wage Act of 2012 would do precisely that, after first restoring the minimum wage back to roughly the same value it had in the 1960s. As my colleague Heidi Shierholz has noted, this would help return the minimum wage to its intended purpose as a basic protection of living standards, and end the lunacy that minimum-wage workers in many states must literally wait for an act of Congress in order to get a raise.
1. Inflation calculated using the CPI-U-RS.