Minimum Wage

Minimum Wage Increases vs. the U.S. Inflation Rate

The first minimum wage law was passed in 1894 in New Zealand. It covered all businesses and industries across the country. The second one was enacted in Victoria, Australia. That would be later in 1990. This one covered a few industries within the country. The U.K. passed its own set in 1909. It was introduced in the U.S. as part of the Fair Labor Standards Act (FLSA) in 1938.

The comparison of minimum wage increment against inflation is no doubt a hot topic in the U.S, often pitting workers on one end and business owners on another. The first minimum wage set in line with the FLSA in 1938 was $0.25. Over the years it has been raised some 22 times. While various states (except five) have their rates, the federal minimum wage currently stands at $7.25.

Alabama, South Carolina, Tennessee, Louisiana, and Mississippi have no state minimum wage laws. Wyoming and Georgia have their state minimum wages lower than the federal rate, meaning that the federal minimum wage applies in their case. Some other states have their minimum wages either same as the federal rate or higher than the federal rate.

According to the National Conference of State Legislatures, Alaska, Massachusetts and Oregon are some of the states with the highest minimum hourly wage rates at $9.75, $10.00, and $9.75 respectively. New York and Washington DC will however be paying higher than most by 2018 and 2022 at rates $15.00 and $13.50 respectively. Others include; Arizona, Colorado and Maine.

Inflation is calculated as an annual percentage increase. The current rate according to the Bureau of Labor Statistics is 1.6%. This is the highest this year. It was 1.4% in January and 0.8% in July. Last year saw very low figures, at -0.1% in January 2015. The highest it has been since the great depression was 4.7% in January 2008.

It has a lot of significance to the local economy. Rise in inflation means you cannot buy as much as you would in the shops.  This puts a lot of pressure to the employers to increase their wages since employees normally would not take anything less than maintaining/improving their standards of living. It’s been fluctuating over the years based on key pointers.

Retail Price index (RPI) and Consumer Price index (CPI) are some of the most common measures of inflation. They form the basis upon which the states and federal government raise or scrap off the minimum wage. Consumer Price Index is the weighted average of prices of essential goods and services. It is calculated by taking price increase for each item in the basket and averaging them.

In 1938, when the minimum hourly rate of pay was set at $0.25, the rate of inflation then was 0.7 percent. According to Pew Research Center, when converted to the 2014 dollar, the wages would be $3.45. You would expect the rate of wage increment to reflect the rising rate of inflation but it rose concurrently with inflation only until the 80’s when the value of the dollar sharply declined.


inflation chart

Source: Pew research Center

This led to an apparent simultaneous rise in both as shown in the nominal minimum wage line in the graph but a decline of the same in reality judging by the current value of the U.S. dollar as indicated by the minimum wage line adjusted to the rate of inflation. According to University of Toronto Mathematics Network, Geometric mean is the best and accepted technique of calculating average percentages.

Looking at the graph, it would be difficult to calculate the exact values but the 1970-1980 wage increment was the highest in comparison to inflation, meaning the dollar had the biggest impact since it can be argued the union was strongest in the 1970’s  but has been less influential since. As for the fight between workers and employers, the former can only hope the government does something about the $7.25, which has never been raised since 2009 despite the fall in inflation.

Click here for wage increment since 1938, here for state wages and here for inflation rates since 1914.

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