Indexing the minimum wage for inflation

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Snapshot for December 21, 2005.

Indexing the minimum wage for inflation
The minimum wage, unlike Social Security and many tax code provisions, is not required by federal law to be adjusted for inflation every year.  Thus, inflation eats away at its buying power every year that Congress does not raise it.  In the more than eight years since Congress passed the last increase, the buying power of the minimum wage has eroded by 17% and is currently at its second-lowest value since 1955. 

As with much else, federal policy regarding the minimum wage has left the states holding the bag in recent years. Federal inaction has led 17 states and the District of Columbia to increase their state minimum wages above the federal rate.  Oregon, Washington, and Florida have found longer-term solutions to this problem, adjusting their minimum wage annually to account for increases in the cost of living.  Vermont will begin indexing for inflation in 2007. 

Washington was the first state to adopt indexing and has been able to maintain the value of its minimum wage after an initial wage increase (Figure A ).  While the federal minimum wage has steadily declined in real terms since 1997, the Washington minimum wage has increased in value and stabilized—although it remains too low to assure even a full-time, year-round worker enough income to keep a family of three out of poverty.

figure

Inflation indexing guarantees low-wage workers a wage that keeps pace with the rising costs of goods and services.  The movement towards minimum-wage indexing started with ballot initiatives in Washington in 1998, Oregon in 2002, and Florida in 2004.  The Vermont legislature has followed and several other states are currently considering legislation that would tie their state minimum wage to inflation. Without an automatic inflation adjustment, states are forced to go through a political process each year to guarantee workers' living standards from year to year. Indexing for inflation provides a sustainable solution to the problem of declining real wages for the lowest-paid workers and should be enacted at both the state and federal level.

This week's Snapshot was written by EPI policy analyst Liana Fox.