The federal minimum wage is intended to help the working poor by ensuring that these workers earn enough money to provide for the basic needs of life. However, inflation can often outpace the minimum wage, reducing it’s buying power. Years can often go by between increases in the federal minimum wage, as political and economic pressures can often result in a reluctance by lawmakers to increase the federal minimum wage.
For example, the longest interval between increases in the federal minimum wage was a 10 year gap between 1997 and 2007. During that time inflation edged upward and the federal minimum wage reached a low point in its buying power.
To ensure that the working poor are able to afford the basic needs of life, a growing number of politicians are advocating linking the federal minimum wage to the consumer price index.
The consumer price index
The consumer price index is a gauge of the average price of various services and consumer goods that the average household is expected to purchase in any given year. The CPI takes a reading of a price change for a constant market basket of various goods and services over a period, usually a year or more, within the same locale, be it a city, state or nation. Basically what it does is determine how much things in an area cost and how those costs rise over time. Because it’s inclusive of a wide variety of necessities that the average family will need to survive, it’s a good indicator of how inflation is impacting the budgets of families.
Along with the U.S. Census and another measure, the National Income and Product Accounts, the CPI is one of the key measurements watched by economists to get a bead on how well families and individuals are doing financially.
When constructing the CPI, economists look at two basic forms of information — weighting data and price data. The price data are compiled after taking a survey of the price of goods and services from various stores and businesses at multiple locations over a period of time. The weighting data are a calculation estimating the shares of various forms of spending as fractions of the full expenditure that the index covers. These weights are most often put together for sampled periods of time from a survey of homes.
In plain English, what the economists do is basically look at how much things costs in a certain area and how much households spend on them over a period of time.
Pros and cons
Proponents argue that by linking the minimum wage to the consumer price index, the government could insure that the federal minimum wage will remain capable of providing a basic income to the lowest skilled and lowest educated members of society and their families. Relying on lawmakers to address this problem in a timely basis has proven unproductive, as the shifting winds of political feeling and debate in this country often lead to gridlock and stalemate on the issue. And while the minimum wage stays stagnant, as it did for almost a decade in the 80s and between 1997 and 2007, prices do not, and inflation eats a bigger chunk out of the take home pay of those least able to afford it. Linking the federal minimum wage to the consumer price index would create small annual increases in the federal minimum wage and would allow workers’ paychecks to keep up with rising prices of basic commodities such as food, health care and gasoline.
Proponents also argue that the small increases in the federal minimum wage created by linking it to CPI would be less burdensome to employers, as they will only be hit with small annual increases instead of taking big hits all at once as they recently did between 2006 and 2009, when the minimum wage jumped by almost $2 per hour.
Opponents of the measure say that the annual increases will lead to higher unemployment, and will actually contribute to greater inflation as businesses will have to keep raising prices to keep up with the expected annual increases to their labor costs. Because of the spiraling inflation and joblessness the measure is expected to create, linking the minimum wage to CPI could actually have the effect of hurting the very people that it’s expected to help. Opponents also argue that there are flaws in the CPI that make it an inaccurate measurement of cost of living.
Nevertheless, several states have already linked their minimum wage to CPI, mostly states in the Western area of the United States.
