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Could minimum-wage indexing be worse for workers than what legislators have done?

This is one in a series of articles funded by a grant from the Northwest Area Foundation.

As Minnesota enters the era of automatic minimum-wage hikes, lowest-paid workers could fare worse than under the Legislature’s traditional stop-and-start approach.

Monday’s indexing deal — which uses an inflation measure known as “the implicit price deflator” and caps annual minimum-wage increases at 2.5 percent — produces much smaller pay hikes than the historical average. If so-called “indexing” removes future pressure to “raise the wage,” workers’ purchasing power could fade considerably over the years.

Minimum wage with inflators, 1976–2013

Had Monday’s deal been in place since 1976 (the year lawmakers increased the state minimum to $1.80 an hour), the minimum wage would stand at just $3.91 (purple line) today, not the current $6.15 (and all calculations assume a governor doesn't override annual increases, a power the deal grants).

Even though lawmakers often go years between approving hikes, Minnesota’s wage floor has basically tacked between two higher trendlines: the uncapped price deflator (green line) and the more commonly used Consumer Price Index (gold line). CPI indexing would have produced a $7.40 hourly minimum, and the uncapped deflator a $6.07, a mere 8 cents off the current state minimum.

The picture looks better if you use a more recent baseline – say, 1993. The DFL deal would’ve produced almost the same minimum wage today as the current minimum or the uncapped deflator. (CPI is still higher, by about 75 cents.)

Minimum wage with inflators, 1993–2013

Why? The last 20 years have been low-inflation – simply put, the deal’s 2.5 percent cap rarely came into play. The 1976 baseline includes the higher-inflation ‘70s and ‘80s, when price hikes would’ve smashed against the cap nearly annually.

Which chart is better? The 1976 base encompasses a period when people thought high inflation would never end, and recent years when some think it will never come back. Financial advisors would probably recommend looking at the longer term.

Through that lens, the indexing compromise, while groundbreaking, is likely less than fans expect or foes fear.

However, it’s important not to overlook the deal’s primary result: the $3.35-an-hour hike from $6.15 to 2016’s $9.50. Add that 50-percent-plus gain to the chart, you can see that if lowest-wage workers lose purchasing power over time, it will descend from a much greater height.

Minimum wage with inflators, 1976–2013, with future increases

Comments (2)

  1. Submitted by Kevin Watterson on 04/08/2014 - 12:32 pm.

    Interesting. My first thought was putting in the inflator with the option for the state to suspend it was a brilliant move to ensure there is a minimum wage debate every year, which the DFL would obviously love. This article made me consider the flip side, which is that when an automatic increase is already in place it will be tougher to pass an even larger increase.

  2. Submitted by Paul Udstrand on 04/10/2014 - 09:11 am.

    Just a few considerations.

    Discussions of minimum wages are kind of useless without context. If you look at the poverty levels and correct them for actual poverty i.e. estimated living wage, you’ll find that the poverty level for an individual in 1972 was around $3000 a year. by 2012 that had risen to around $13,000 a year. As a general rule the actual poverty level is usually double the official rate, or put another way, the living wage in the US is usually double the minimum wage. For instance a living wage in the US right now is typically estimated to be around $15.00 a hour compared to official minimum wages around $6 – $7 an hour.

    If you work that out you find then that minimum wages since 1972 have amounted to about 63% of living wages, or the actual poverty rate. The current bump up to $9.50 an hour raises minimum wage up to 83% of the living wage, it’s a bigger bump than usual. For instance between 1971 and 1981 MW saw increase of 47%. The current minimum wage is a 76% increase, and it’s then indexed to rise. So in order to really make this comparison you’d have to go back to 1972, calculate a minimum wage at 83% of poverty level instead of 63$, and work it out from there.

    Is this index sufficient? No. But the index combined with the more substantial rate increase might put workers on a better trajectory as long as inflation doesn’t explode. Had the minimum wage been this close to the living wage for the last four decades low income workers would certainly have been better off.

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