Thursday, July 11, 2013

Is there a strong case for raising the minimum wage because of lost purchasing power due to inflation? Maybe...but maybe not. I report, you decide...

There is much ado in political circles about the purchasing power of today's minimum wage compared to some point in the past.  The case is made that the minimum wage has not kept up with inflation and workers earning that wage today have lost ground relative to those who came before. As with many things in economics, the answer seems to be "it depends".

Here is a graph from Mark Perry that I tricked up a little. The RED line tracks the minimum wage in actual dollars terms from 1938 to the present. In 1938 it was $.25 cents and today it is $7.25. All the increases are shown between those two points.

The BLUE line is a little tricky to understand. It represents, in inflation adjusted terms, what a minimum wage  worker would have to earn TODAY to have the SAME purchasing power as a minimum wage worker at some time in the past.

Example:  See the $10.66 per hour at the high point of the BLUE line? This means that a worker today would have to earn a minimum wage of $10.66 to have the same purchasing power as a worker in 1968 at that years actual minimum wage.  That's not good, is it?
Source: Carpe Diem
Look at the gold horizontal dotted line and read it from right to left starting at the green dot. As you move from right to left and encounter a RED DOT this means  today's minimum wage has the same purchasing power as the actual minimum wage at that time.  In other words, all else is equal in terms of the purchasing power of the minimum wage today relative to the past.

If the BLUE line falls below the Gold line then today's minimum wage, in inflation adjusted terms, is HIGHER than than the purchasing power of that years actual minimum wage.  If the BLUE line is above the Gold line then today's minimum wage has LESS  purchasing power than that years actual minimum wage.

In terms of purchasing power the current minimum wage of $7.25, it has been relatively stable over time. The obvious exception is a relatively short time span between the mid-1960's and the late 1970's.

This was a freakish period of high, abnormal inflation. If I was going to pick a time period to make a historical case that the minimum wage is too low, then this small window is what I would choose.

But would it be accurate?

I report, you decide...

Having said that, I personally believe it should be raised but in small-ish increments to make it more seamless and less disruptive for businesses.  I don't think that is unreasonable.
View My Stats